Market Overview
Statistics suggest that the next 12 months following mid-term elections in the US are very positive for equities, and so it began yesterday with Wall Street posting record highs for the Dow and S&P 500. However we must now look ahead to two crucial factors that could significantly impact markets at the end of this week, starting with the ECB monetary policy decision today. Asian markets have reacted cautiously, with the Nikkei 225 losing 0.9% (although other markets are broadly flat). European markets are also cautious, with slight weakness in early trading.
In forex trading, looking at the major currencies is seems as though the dollar is again following a strong day with one of slight correction, with the greenback trading down against all majors. The major beneficiary of this seems to be the euro (and Swissy) in front of the ECB meeting, whilst the Aussie dollar is also positive (but no more so than any others) after the employment data came in slight better than expected. The weaker dollar is also helping to support the gold price today which is slightly higher.
The European Central Bank dominates the economic calendar today. Analysts are struggling what to make of reports that several of the ECB’s governing council members are unhappy with Mario Draghi’s leadership style and unscripted comments in the press conference. That makes today’s meeting and more importantly the press conference at 13:30GMT extremely interesting. No change is expected but the market will still be looking for signs of further easing. This may mean that if Draghi has had his wings clipped, the market could be disappointed.
Other announcements today include the UK industrial production at 09:30GMT (+1.6% year on year expected, down from 2.5% last month), whilst the Bank of England is not expected to show any movement on monetary policy when it announces at 12:00GMT. US weekly jobless claims are expected to remain broadly flat at 285,000 (from 287,000 last week).
Chart of the Day – Brent Crude Oil
The weakness in Brent Crude continues and with the breach of the consolidation low at $82.60 in the last couple of days the outlook suggests that there will be continued downside. The problem is that the recent consolidation merely acted to unwind oversold momentum, however with the 21 day moving average (currently $85.84) continuing to act as an excellent basis of resistance, the sellers have once more regained control. The momentum indicators such as RSI, and Stochastics have also renewed downside potential and are again putting pressure on the price. It looks as though the Brent price is coming back for a test of the $80 which is the next level of long term support. The intraday spike higher yesterday to $84.84 is now the near term resistance, but any strength continues to be sold into and the immediate low at $81.63 could come under pressure again in the coming days.
EUR/USD
Although the euro took out the support at $1.2500 this week which opens for further weakness, the reaction since then has been fairly indecisive. The sellers have not been able to grab any real control in front of the latest ECB meeting today. However this should merely be just noise before the next leg lower. All technical indicators suggest further weakness will be seen in due course. The $1.2600 neckline remains the basis of resistance with that head and shoulders continuation pattern which implies $1.2320. I still see any rallies (possibly this afternoon if Draghi fails to paint a dovish enough picture) as a chance to sell as this sequence of lower highs continues and momentum indicators remain in bearish configuration. I expect a retest of the recent low at $1.2440 before further weakness is seen.
GBP/USD
With the rebound from yesterday’s spike lower (to $1.5867), Cable is back to trading around $1.6000 again and it could almost be argued that the consolidation outlook is once more in place. However the bearish bias remains a key feature of this chart, with the overbearing downtrend, series of lower highs (the latest is at $1.6182) and the momentum indicators in weak configuration. Also the fact that the market has now broken below the support from mid-October will now be in the back of traders’ minds despite the initial rejection of the move. Today has the Bank of England rates decision but with Non-farm Payrolls tomorrow the consolidation could continue. The inference from the chart is that rallies are a chance to sell and the bears remain in control and all things remaining equal a retest of the lows can be expected. A consolidated move above $1.6050 would brighten the near term outlook.
USD/JPY
Sharp rallies very rarely move exclusively in one direction without any near term blips and it would seem as though this move on Dollar/Yen will be no different. The sharp move above 114 yesterday broke through another old resistance at 114.65 to open the next minor resistance at 115.92 before 117.94 (October 2007 high). However looking on the intraday hourly chart, the last couple of days has shown periods of gains along with a consolidation which results in a dip back towards a previous breakout level. This is what we are seeing again overnight with a move back from 115.50 back towards the support of Tuesday’s high at 114.20. Volatility remains high in the pair, but after what has been seen recently, this is understandable. The move early today is likely to prove to be another opportunity to buy as it has helped to unwind overbought momentum on the hourly momentum studies. The concern would come if the price fell back below the support at 113.00, however for now the outlook for this strong run higher and bull control remains sound.
Gold
After the significant weakness in yesterday’s move a bout of consolidation should not be unexpected. The outlook though looks increasingly concerning for the bulls now. Having had the crucial support of $1180 removed, the chances of further downside are now significant and this was shown in yesterday’s price action. The next support comes in at $1126 which is a 50% Fibonacci projection of the $1179/$1180 sell-off measured from the $1433 reaction high, whilst this also almost coincides with a reaction support at $1123 as well. Momentum indicators are incredibly weak once more and rallies will be seen as a chance to sell now. The initial resistance comes in at $1161.25, with the $1174/$1180 band increasingly important now. Below $1123 the next real support is not seen until the March 2010 low at $1085.
WTI Oil
The outlook remains weak following the completed descending triangle that implies $75 (which is also the crucial low from October 2011). Yesterday saw WTI stage something of a rebound, however this sort of thing is not uncommon as it has followed the largest traded volume day of the year, and there is often a period of consolidation or even trend retracement after huge volume days. Also, this rebound is helping to unwind near term stretched momentum with the RSI back towards 30. However, it should not change anything medium term and I would still be looking to use any rebound towards the resistance band $79.40/$80 as a chance to sell. The downtrend from the descending triangle comes in at $81.20, whilst there would need to be a move above $82.88 to suggest the outlook might be changing.