The dollar rally that threatened on Friday in the wake of the payrolls report tentatively remains on track this morning. The positive surprise in Friday’s labor market data triggered a near term rebound in the dollar, but can it continue? Markets are responding slightly to the continued lack of consensus in Congress over the composition of the next US fiscal stimulus package, but have so far not lost the rebound impetus. President Trump has gone ahead with an executive order to enable a less generous $400 per week of unemployment benefits, in addition to other relief on evictions and student loans. However, markets seem to focusing more on the lack of traction on the whole package of support. We are seeing cautious moves across forex majors, whilst consolidation on commodities (mostly precious metals) also featured. The key question that traders will be asking will be whether the hugely stretched dollar sell-off that threatened a reversal last Friday will be able to find traction? This would have a real impact on the near term outlook for gold especially.
Wall Street closed mildly higher on Friday with the S&P 500 +0.1% at 3351, whilst US futures are a shade higher today, with the E-mini S&Ps +0.2%. Asian markets were cautious, with a public holiday in Japan, but China’s Shanghai Composite was positive at +0.7%. It is interesting to see European indices looking positive early today, with gains on FTSE 100 +0.6% and DAX +0.2%. In commodities, there is consolidation on gold (-0.2%) and silver (+0.4). Oil has bounced by around half a percent after Friday’s slide.
It is a relatively quiet start to the week on the economic calendar. With little to change the narrative in the European morning, the JOLTS jobs openings at 1500BST are the only real data of note. Consensus is expecting to slip slightly to 5.30m in June (after being at 5.40m in May).
Chart of the Day – EUR/JPY
Euro outperformance through the major pairs has been impressive, but is it about to have a little corrective phase? The chart of Euro/Yen has been trending decisively higher since May and accelerated in a shorter uptrend during late July. However, after Friday’s negative candle, this uptrend is coming under threat. The three candlestick set up is quite similar to an evening star reversal (although not as well defined as the one in early June). A strong bull candle into the pattern on Wednesday, followed by an almost doji candle (denoting uncertainty) on Thursday and Friday’s bear candle to complete what is arguably a topping formation. It also comes with the daily RSI crossing back below 70 (whilst MACD lines are also threatening to “bear cross”. It suggests that today’s session could be important in the near term outlook. After posting a mini reversal set up, another negative candle that breaks the four week uptrend, could open for a corrective phase near term. The market is threatening lower early today. We would look towards a retracement perhaps back towards the support around 123.00, which is also around where the support of a three month uptrend comes in. Initial resistance is at 125.10, with the 125.60 high increasingly important now. The hourly chart shows the rally beginning to falter, with support at 124.00/124.25.
We have been considering recently how the bull run on EUR/USD has been looking a little tired. This began to seep into a corrective move on Friday in the wake of the payrolls report. The first of our accelerated uptrends (the near three week trend) was broken by a decisive negative candle. The market has now retreated from mounting resistance at 1.1915 and the reaction in the next few of sessions could be crucial. The slightly shallower four week uptrend comes in as a basis of support at 1.1750 today and if this trend is also broken, then it would begin to suggest that the bulls are struggling to sustain their stranglehold on the market. At the least, the market looks to be in consolidation, and a range between 1.1695/1.1915 has developed. One negative candle does not suggest imminent breakdown and correction. However, we are now monitoring momentum indicators, which are beginning to show signs of fatigue. The mild negative divergence on daily RSI and the threat of a “bear cross” on MACD lines add to this. The real shift in sentiment would though come if 1.1695 support was broken. For now, the market is all but flat today and consolidating around mid-range. A continuation of Friday’s selling would be a warning. The hourly chart shows 1.1800 is a near term pivot (and effectively mid-range, whilst 1.1850 adds to resistance overhead. Friday’s low at 1.1750 is initial support.
Breaking a near three week uptrend, Cable has just turned back for the first time really since the July rally kicked off. A decisive negative candle, down -95 pips on the day is the biggest down day since mid-June. There is no top pattern completed yet though but the support at 1.2980 is taking increased importance now. So far, this morning, we have not seen Friday’s selling pressure leak into the new week, but how the market resolves what is now a mini consolidation range of a shade over 200 pips between 1.2980/1.3185 will be important. Coming just under the key Q1 2020 barrier of 1.3200, the bulls will be a little cautious now. There is slightly less development in potential momentum reversals, but we are now on the lookout for a bear cross on MACD lines. Again, as with EUR/USD the hourly chart shows a mid-range pivot has formed at 1.3100 and is now a near term gauge to watch too. A close under 1.2980 would imply a retracement of the rally would drag the market back towards the old key 1.2810 breakout. For now, we are neutral but are mindful of just how far this rally has gone and the loss of momentum which could still induce profit taking. Sub 1.2980 would likely be the trigger.
After Friday’s mild positive surprise in the payrolls report, the dollar has picked up and subsequently, USD/JPY formed a positive candle. This now means a rally is testing the overhead supply 106.00/106.60 once more. Interestingly, this resistance band is holding, but is also having the confluence of resistance from the three week downtrend (which is around 106.00 today). We continue to look upon any near term dollar strength as being counter to a bigger medium term bearish outlook. As such we are looking to use this rebound once more as a chance to sell. The dollar bulls seem to be struggling to generate any real traction this morning. The technical indicators were looking to swing higher on Friday and lacking intent and are still within the scope of a medium term negative outlook. The RSI is tentatively edging into the mid-40s whilst Stochastics are around 50. The band of resistance 106.00/106.60 is a prime area for the next lower high, whilst the negative outlook is intact below 107.50. We favour a retest of the 105.30 low and then 104.17 in due course.
The bull rally on gold was already beginning to stumble ahead of Friday’s payrolls report, but the risk positive/dollar positive report has finally started to see gold dragged back. After a loss of -$28 on the session, there is a real risk of this turning into something bigger now. How the market responds in the coming days to the price pulling back around $40/$50 off its highs will be important as to the near to medium term outlook. A fall back to $2015 has stabilised initially today, but if the selling pressure ramps up again to breach this reaction low, then the momentum in a correction could begin to develop. If one strong negative candle turns into another, then the market could start to see some greater profit-taking. A three week uptrend is being severely tested this morning (coming in at $2031). There is effectively now a small topping pattern that would form and be confirmed below $2009. This would then open for a deeper correction back into the $1940/$1980 consolidation band. As the market consolidates early today, there is initial resistance at $2036 and then $2048 to overcome for the bulls to get back on track.
Brent Crude Oil
After promising to drive a breakout into the high $40s last week, oil meekly limped into the close on Friday with a rather disappointing slip back. How the bulls respond in the support band $42.90/$44.90 will now be key. Holding this band of support would be seen as another development in the broad recovery and a buying opportunity to play for the continued run of higher lows. There is a feeling that this is constantly a bull run with the handbrake still on, with two steps forward and one step back. However, it means that once support forms, as long as $41.30 key higher low is intact, this will be the next opportunity to buy. An early tick higher this morning is encouraging for the bulls and is leaving Friday’s low as an initial support around $44.25. There is still the need to “close” the gap at $45.20, but given the positive medium term configuration on momentum indicators, this should still be seen in due course. Last week’s high of $46.25 is initial resistance for the bulls to target.
Dow Jones Industrial Average
The rally on the Dow keeps rolling on. Another positive candlestick and a close towards the high of the session. Friday saw a slightly less decisive strength, but still another session where weakness was bought into. The market continues to eye the key June high of 27,580. Despite all the positives, there is still a slight tailing off on momentum indicators, however, RSI and Stochastics remain strong. There is little reason currently for any serious corrective momenutum, whilst there is good near term breakout support at 27,070. Any slide back into 26,610/27,070 would be seen as another opportunity to buy. Key support remains with the higher low around 26,000. Beyond 27,580 the resistance comes in at 28,400 and the key February bear gap at 28,850.