Market Overview
After a day under pressure yesterday the consolidation on the dollar is moving closer to a correction as markets look to Non-farm Payrolls. This may be something of a surprise as the dollar appears to have (at least temporarily) become decoupled from the movement on US Treasury yields which continue to move higher. Despite the strength of Treasury yields and the positive surprise in Wednesday’s ADP employment change, there is an air of caution in the forex market moves, there is still a minor dollar bear bias that is forming. The trade weighted dollar index needs to hold up above 100.65 to prevent a small top pattern formation that would imply a corrective target of 99.25. This is showing with the euro aching to break higher, sterling making ground and the yen also looking close to support. The payrolls data will be interesting today as it will be a risk-on report on a strong number. With a Fed rate hike pretty much guaranteed in a couple of weeks, strong US data will be taken as risk positive. There is though a caveat of political risk in Europe with the concern of Sunday’s Italian referendum weighing on sentiment, the reaction to which will be seen on Monday morning.
Equity markets are beginning to look more corrective with the S&P 500 now below is previous breakout, falling 0.3% to 2191. Asian markets were also lower overnight with the Nikkei down 0.5%. The European markets are again looking weaker with the DAX confirming its near term breakdown.
Traders will be watching for the Non-farm Payrolls in today’s US Employment Situation. After the ADP employment change beat by 55,000 expectation will be positive going into the data. The headline Non-farm Payrolls are expected to improve to 175,000 (from 161,000) so there is upside risk of a headline beat given the ADP surprise on Wednesday. However the markets will also be keenly watching for average hourly earnings which are expected to be +0.2% for the month and this would hold the year on year growth at around 2.7%. The unemployment rate is expected to stay at 4.9%, whilst the laborforce participation rate will also be a key factor given that it dipped back slightly to 62.8% last month.
Chart of the Day – DAX Xetra
The DAX had been hanging on to the near term range between 10,575/10,800 by a thread, however, yesterday’s move decisively broke through the support to complete a near term top pattern. This means another retracement within the broader 4 month trading range 10,175/10,827. The implied break is for 225 ticks of downside to 10,355. The momentum indicators have been leading the market lower in recent days but also show that there is further downside potential on both the RSI and the Stochastics. The old support band 10,575/10,600 within the near term range now becomes an area of overhead supply and rallies will be seen as a chance to sell. The key near term resistance is the reaction high at 10,692. The hourly chart shows the negative configuration of the hourly indicators with the rallies failing around 60 and the hourly MACD lines now with a bearish outlook. Already the intraday chart shows a pullback to the neckline which found resistance before falling away into the close. The hourly chart shows minor support around 10,450 which is an old pivot around mid-range that has consistently been seen as a turning point near term.
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