Market Overview
Investor sentiment remains under pressure as the preference for safe haven assets continues. However there is also a sense that the dollar rally that had been such a feature of trading over the past few weeks I s struggling to continue, stumbling into a consolidation. Although Wall Street has clearly not been immune to the recent market declines, yesterday we had the first sign that the bulls were beginning to hurt. Another 1.7% sell-off on the S&P 500 has taken the index below a key reaction low (at 1905) for the first time since February. Technically this also completes a big top pattern and drags the index below its longer term moving averages.
Asian markets were mixed though with the Nikkei 225 2.0% lower, playing catch up having missed yesterday’s session due to a public holiday (Sports Day), however many other markets have had a fairly muted reaction. European indices are trading lower in early exchanges as the Wall Street declines filter through. There could also be an element of concern over the economic data today, with especially the German ZEW Economic Sentiment indicator at 10:00BST in focus. The ZEW has been falling throughout 2014 and is expected to fall further to 1.0 (from 6.9) and is a very good gauge for German GDP.
Forex trading has shown the dollar fighting back overnight. After its late session jump yesterday, the euro is lower, along with the yean and sterling also weaker against the greenback. The gold price is also slightly lower with the rebound for the dollar today. In fact the only major currency to be outperforming the dollar today is the Aussie dollar, after the Australian business confidence indicator came in better than expected overnight. The major focus today though will be on the UK CPI inflation data which is released at 09:30BST. A further decline is expected to 1.4% from 1.5% last month which would give the Bank of England further excuse to hold off from hiking interest rates and would put sterling under further pressure today.
Chart of the Day – EUR/GBP
For the past week of so that euro has been performing much better than sterling against the dollar (no coincidence that this has been seen in the wake of the latest ECB press conference where Draghi underwhelmed on the latest easing measures). This improved performance of the euro has been reflected in a rebound for EUR/GBP and the move has now taken out its first key near term resistance. The old support at £0.7900 had held the euro back for a few days but was burst through yesterday evening. The EUR/GBP chart still has a long term bearish outlook but this move is a significant improvement for the euro. The momentum indicators are now into an important near term phase because the RSI and Stochastics are at a level where normally they would begin to roll over and start falling as sterling reasserts its strength. However the breakout level around £0.7900 is supportive and there is a higher low around £0.7850. It will be interesting to see if the euro can hang on to £0.7900 today as the next resistance at £0.8009 could come under threat if the support can begin to for above the breakout.
EUR/USD
A sharp move higher late in the day for the euro has given the bulls hope that the recent recovery still had some upside potential. The move back above $1.2700 which had been the neckline for an intraday base pattern last week, has now been finding support above overnight. This move has improved the daily momentum indicators once more and has changed the outlook on the intraday hourly chart. There is a small uptrend that has formed over the last couple of days, whilst the euro is also trading above all its hourly moving averages. Despite turning lower from the initial break at $1.2768, the move now brings the recent high at $1.2791 back into range. The initial support is the $1.2700 breakout and then $1.2657 and the key near term low at $1.2604.
GBP/USD
The theme of sterling underwhelming of late continues as Cable drifts sideways (whilst the yen and euro strengthen against the dollar). The outlook for Cable therefore remains under pressure as momentum indicators show continued bearish negative configuration and little real sign of any improvement. Having seen the recovery roll over at $1.6226 (under the key near term resistances at $1.6250 and $1.6280, the rate has simply drifted sideways, neutralising all the intraday hourly momentum indicators and moving averages. Yesterday’s high at $1.6126 is the initial resistance with support coming in at $1.6006. With other currencies strengthening against the dollar, there could be some residual strength for Cable, but the chart is showing little sign of it yet.
USD/JPY
The stronger yen continues drag Dollar/Yen lower and yesterday the bottom of the support band 106.80/107.40 was tested. Despite holding on by the skin of its teeth (106.73 was the low) it looks like there will be continued downside pressure as Dollar/Yen moves ever lower towards its 106.00 implied downside target from the recent top pattern formed on the move below 108.00. Initial resistance now comes around the old minor support within the downside move at 107.50. However, looking at the daily chart I am now on the alert for the medium term buy signal that I believe will be coming soon. The RSI, MACD lines and Stochastics are now all back into the sort of areas that would give ideal buy signals and being that I see this current decline as a bull market correction, we need to be ready for a buy signal.
Gold
The gold price reacted positively yesterday to the renewed dollar weakness to push ever closer to a test of the $1240.60 resistance. Momentum indicators continue to improve with the rebound and suggest that gold is approaching a key near term inflexion point. The RSI is now moving back above 50, whilst the Stochastics are above 80, both of which mean that if this is a bear market correction we should be expecting the next sell signals imminently. However a move above the $1240.60 would be a positive signal that the bulls are gaining in confidence and this might be something more. It would open the next resistance around $1260 too. The intraday hourly chart shows a sequence of higher lows forming with $1225 and $1217.10 the initial support.
WTI Oil
I spoke yesterday about the potential for a recovery. It is far too early for that, however across the past few sessions there has been a minor consolidation. Minor rebounds and consolidations have tended to be sold into in recent weeks but with the downtrend dating back to 30th September currently around $85.70 there is scope for a pause for breath near term. The daily momentum indicators remain in bearish configuration and the bulls are really struggling to gain any traction before the selling pressure resumes. With the RSI below 30 and Friday’s low at $83.59 still intact, the potential for a technical rally is still there. However unless there is a supported move above $86.29 then the likelihood is that this consolidation will ultimately be treated the same as all the others in recent weeks, as a chance to sell. Below $83.59 re-opens the downside towards the next key support of the June 2012 low at $77.28.