The last few sessions have seen an increasing tide of risk negative influences hitting on market sentiment. Concerns over economies re-opening and the potential for second wave infection rates increasing are a factor. However, markets are also having to price for a re-emergence of trade risk, as the US and China both seem to be positioning themselves for less cordial relations. The latest comes as China is preparing measures to protect itself from litigation from the US over prospective COVID-19 damages. Jerome Powell cut a very cautious tone yesterday over the outlook for the US economy. Fed speakers have spent the week briefing against the prospect of negative interest rates and chair Powell stuck to this line. He did though also suggest the need for further fiscal support in the months ahead. This all added up to risk negative impact on markets but also dollar supportive. Treasury yields have fallen (the US curve also bull flattening) whilst equities are under growing pressure. It is interesting to see gold has edged higher from its $1700 consolidation area, whilst safe haven major forex is performing well (USD and especially JPY).
Wall Street closed a second session decisively lower with the S&P 500 -1.7% at 2820 and technical top patterns are now threatening. US futures are further lower today with the E-mini S&Ps -0.4%. This is impacting across global markets, with Asian indices lower (Nikkei -1.7% and Shanghai Composite -0.8%). European markets are also under pressure with FTSE futures -1.1% and DAX futures -1.2%. In forex, there is a continuation of yesterday’s risk negative and USD positive theme. JPY is the main outperformer, whilst GBP continues to be the main underperformer. In commodities, the safe haven bias is helping gold perform well (despite the dollar strength) and hold support today, whilst silver is less of a positive outlook. Oil continues its recent consolidation.
It is quite light on the economic calendar today. The only significant data of note will be the US weekly jobless claims at 1330BST which is expected to continue to reduce, but still at an enormous 2.500m claims (last week 3.169m claims).
There will also be a two central bank governors speaking today. The Bank of England’s Andrew Bailey is speaking at 1130BST, whilst the Bank of Canada’s Stephen Poloz is speaking at 1530BST. For the FOMC, there is also Neel Kashkari (dove) speaking at 1600BST.
Chart of the Day – EUR/GBP
We remain sceptical of the strength of the euro in the coming sessions, however, with supports breaching on Cable, we are more concerned by sterling weakness developing. Subsequently with strong support forming in recent weeks around £0.8680 we are now see the Euro/Sterling cross rate rising in recent sessions. This rally is now testing resistance of a month long range at £0.8865. What is notable is that this is a move which is being led by a decisive positive shift in momentum. The RSI is gaining impetus in a move to the high 50s which is a seven week high, whilst MACD lines are beginning to accelerate higher from a bull cross and Stochastics are pulling strongly higher too. Although yesterday’s intraday move above £0.8865 could not be sustained into the close, the bulls are having another look today. They will be fighting for a decisive move clear of the £0.8865 resistance which would effectively end the month long consolidation and complete a base pattern. This would then imply a move of +180 pips higher towards £0.9040 in due course. The hourly chart shows good support now forming between £0.8805/£0.8855 and any weakness towards 40/50 on hourly RSI is a chance to buy.
The euro remains stuck in the lower half of its near six week range. Support at $1.0725./$1.0765 is holding firm but rallies still seem to be struggling to find traction before faltering again. Can the resistance of the pivot at $1.0890 be overcome? The past couple of sessions have been testing the pivot but it remains a key near term barrier. For now, the bulls are stuck in a rut and once more we see the market drifting back lower this morning. Momentum indicators do not suggest any positive traction is being called, as RSI remains anchored in the lower reaches of the month long 40/56 range, whilst MACD and Stochastics begin to fall over again. This infers a test of support is more likely, with $1.0725/$1.0765 still a key basis of a range floor. The hourly RSI is worth watching though as if this is a range, then there should be a pick up around 30/35 again (which has held for the past week). The outlook favours selling rallies towards $1.0890 and to continue to play for the bottom of the range. For now though, we expect this range to continue.
With a third successive negative candle completing yesterday, Cable is coming under increasing bearish pressure now. What is concerning is that the bulls have had their chances in each of those three sessions, only to head for the hills as the session has drawn to a close. The support at $1.2245 has now been broken, to take Cable to a five week low and open the key support at $1.2160 again. The deterioration in momentum indicators is also concerning, as RSI is now falling at seven week lows, whilst MACD lines are deteriorating decisively below neutral and Stochastics drop into bearish configuration. This is now all setting up for a test of the key April low at $1.2160. If this key support were to be breached it would be a decisive momentum and would signal a significant shift in sentiment for Cable. It would confirm that the $1.2245 breakdown as a double top and imply -400 pips towards a target of $1.1845. Already we see intraday rallies increasingly as a chance to sell. The hourly chart shows $1.2265/$1.2340 is now a near term sell zone, but any failed rallies under $1.2400 will be a bull concern now.
The yen seems to be gaining the ascendancy once more as there have now been two bear candles formed in the past two sessions and the market continues to fall back today. We spoke previously about Monday’s impressive positive candle needing to be confirmed but the bulls laying the foundations of support. These foundations are not forthcoming at the moment and the rally is being torn down again. This has very similar hallmarks of the early April rally which hit the buffers after three strong sessions, only to then drift steadily lower. The improvements in momentum are already reversing, with Stochastics bear crossing back lower once move and RSI falling over at 53 (which is almost exactly where the early April rally fell over). Breaking back below 106.90 is an important signal too, as this was an old pivot line which the bulls would have been looking to use as support. The hourly chart realistically shows 106.60/106.90 as the “last chance saloon” for this rally, but given the increasingly corrective formation on hourly momentum, this looks to be a negative outlook just resuming now. The bulls need s decisive move back above 107.15 (the reaction high in the wake of Jerome Powell’s speech yesterday) to prevent a bearish outlook from resuming.
The bulls are threatening to grasp control of the market once more. A decent gain on the day (of +$15) and a solid positive candle has pulled the market higher within the consolidation. Reaction around the initial resistance of $1722 will now be key. This has been a barrier for almost three weeks but with the market pulling clear above the $1702 pivot (which has been a consistent consolidation area for 12 sessions in a row) suggests that the bulls are stirring from their slumber. A mini two week uptrend is also now forming within the range. As the market has been steadily forming converging support and resistance levels over the past month, a move above $1722 could be significant. There is an interesting uptick on Stochastics this morning as an initial move, but there needs to be more on RSI and MACD lines to see more conviction. It is still too early to say that this is the time for an upside breakout, but the bulls are at least beginning to mobilise again as positive hourly momentum is building. A close above $1722 opens $1738 and the more considerable resistance of the multi-year high at $1746.
Brent Crude Oil
A mild negative drift is increasingly taking hold on Brent Crude as the market consolidates around the $29 support. This drift has taken the steam out of the late April/early May sharp rebound. For now, this is still just a pause in the recovery. The improvement on momentum indicators is holding ground, with RSI above 50, Stochastics in strong configuration and MACD lines still rising towards neutral. However, oil traders will be eyeing the big bump in the road ahead, with the WTI June expiry on 19th May. The issues over a lack of storage and the May expiry was the source of last months huge sell-off and the technical set-up is again very similar. The initial support at $28.85 is a warning, whilst a move under $27.15 would really open for renewed weakness. It would be a sign of stability in the market if oil can get through the next week without serious renewed selling. Resistance at $31.50/$32.25 is a key barrier to overcome and if so, the way towards $36.40 can be open. For now though, the bulls are concentrating on holding support.
Dow Jones Industrial Average
We have now seen the first significant negative technical move on the Dow since the recovery began. A second successive bearish one day candlestick (on a -2.2% close) has resulted in a closing break of the reaction low at 23,360. Having formed resistance of at 24,380 on Tuesday, this now means that the Dow is forming lower highs and lower lows, which is the basis of a new trend lower. The confirmation of the move would now be a break below the late April low at 22,490 which is the first formal higher low of the recovery. If this is broken then Dow Theory suggests (no relation to the Dow Jones Industrial Average) that a new phase has formed and the bears are in control. Breaching 22,940 would also complete a month long top pattern and imply around 21,150 as a corrective target. There is resistance of near term overhead supply 23,360/23,660 which is initial overhead supply.