In the FOMC press conference, Jerome Powell said “it is not the beginning of a long series of rate cuts”. Cutting by 25 basis points was the absolute bare minimum the market had been hoping for from last night’s decision from the Fed. From the market response, there was a clear disappointment. Although there were nods towards “muted inflation” and “uncertainties” to the domestic economic outlook, the doves have been disappointed. Bond markets gave it the thumbs down, with a significant flattening of the yield curve (at least on the 2s/10s spread). This is the opposite of what the Fed would have wanted to achieve. The dollar has strengthened decisively again, again something that will irk the Fed. There have been notable breakdowns on EUR/USD and Cable, whilst Dollar/Yen is at a two month high. Other asset classes are also responding, with equities having a wobble and commodities also lower. With a nod from the FOMC towards data dependence there may now need to be an unwinding of expectations of rate cuts as US economic outperformance continues. Turning to today, the PMIs will be seen as important for not only the US but across the other major economies too. Furthermore, there is an intriguing Bank of England monetary policy decision to throw into the mix (not to forget Non-farm Payrolls tomorrow). Lots more for traders to ponder.
Wall Street closed decisively lower in the wake of the Fed decision. The Dow was -1.2% with the S&P 500 -1.1% at 2980. US futures are also pointing to further weakness of -0.2% at the open today. Asian markets have been mixed with the Nikkei recovering from sharp intraday weakness to close +0.1% higher, whilst the Shanghai Composite was -0.8%. In Europe trades are gearing up for another weak open with FTSE futures -0.4% and DAX futures -0.5%. In forex, the USD continues to strengthen into today’s session, with strength across the major pairs. Given the doves were so disappointed from the Fed, the underperformance of JPY and CHF is notable. In commodities, gold has slipped another half a percent, with silver accelerating lower. Oil is also opening over a percent lower this morning despite the continued EIA oil inventory drawdown.
The tier one data continues to come for the economic calendar on Thursday. The first trading day of the month is one for the key manufacturing PMIs. Eurozone final Manufacturing PMI is at 0900BST and is expected to be unchanged from the flash of 49.4 for July (which is down from 47.6 in June). The UK Manufacturing PMI is at 0930BST and is expected to see Brexit uncertainty further hitting the sector, with a slip back to 47.7 (from 48.0 in June). The Bank of England monetary policy decision at 1200BST is not expected to throw up any surprises with the MPC set to keep rates at +0.75% (+0.75% in June). However, watch out for the meeting minutes with the voting preference for any dissenters. None are expected with all expected to vote to hold at 0-0-9 (as this was back in June at 0-0-9). Also it is “Super Thursday” which means the Quarterly Inflation Report with its inflation and growth projections are updated, so given the continued pressure of weaker PMIs potential downward revisions for growth could be seen. US Weekly Jobless Claims are at 1330BST and are expected to tick slightly back higher to 212,000 (from last week’s 206,000). The US ISM Manufacturing is at 1500BST and is expected to improve slightly to 52.0 (from 51.7 for June).
Chart of the Day – EUR/JPY
The rally in the wake of the ECB meeting has struggled to sustain traction and now the selling pressure seems to be returning. The resistance band of overhead supply 120.75/121.30 has been restrictive to the upside and the market seems to be setting up for another leg lower. With a majority of negative candles under the 121.30 resistance coming under all of the falling moving averages this seems to be part of a bear market rally. Momentum indicators remain negatively configured on a medium term basis (RSI failing under 50, MACD lines struggling under neutral and Stochastics also tailing off around 50). Subsequently, rallies are a chance to sell. Yesterday’s bear candle which closed back below the old key low at 120.75 is a one week low and represents growing renewed downside momentum. Today’s early rebound back towards 120.75 looks to be a chance to sell, with resistance at 121.40 now key. The key multi-year low at 120.03 will come under renewed pressure in due course as the negative bias resumes.
With the Fed less dovish than the market had been looking for, the dollar have seen the next bull leg begin. A huge bearish candle on EUR/USD has seen a decisive breach of the key floor of $1.1100. The move is not stopping either. This is now the euro at its lowest since May 2017 and opens initially $1.1000 but the next key support is a big pivot from 2016/2017 at $1.0850. Momentum indicators are particularly negatively configured for now as MACD lines accelerate lower whilst RSI and Stochastics also turn lower. It will be interesting to see how RSI reacts now as 30 has been a limiting level over the past 14 months and a technical rally may be seen. There is key overhead supply now between $1.1100/$1.1160 to house the next selling opportunity.
Volatility on Cable remains elevated. A market fixated on Brexit also had the huge uncertainty of the Fed decision to contend with yesterday. Big intraday swings on Cable took traders on a bit of a roller coaster ride yesterday but essentially the negative outlook remains solid. Selling pressure resumed late into the session and has continued into today’s early moves. The pressure on $1.2100 as a basis of support has once more taken hold , a (tentative) level from March 2017 that is holding for now. A closing breach opens $1.1980 as the next, but also critical level of support. There is now a key marker of resistance from yesterday’s high, at $1.2250. This remains a very difficult market to play on a near term basis, but given the outlook for sterling weakness and dollar strength has not changed, the negative bias on Cable continues.
The market has been looking at the key 109.00 resistance on numerous occasions in the past few sessions. In the wake of the Fed, there was another test that was rebuffed, however, overnight this resistance has been cleared. The reaction of the European traders this morning and into this afternoon’s US session will be key as to whether this move is confirmed now. Momentum is building more positively on the intraday breakout. MACD lines are now puling above neutral and RSI is into the 60s. These conditions need to continue for the breakout to be validated. Holding above 109.00 is a two month high and is the market breaking a 106.75/109.00 trading range which effectively completes a base pattern. If the move can be confirmed then a test of the key medium term pivot band 109.70/110.00 is the minimum but important next test. The neckline at 109.00 is a basis of support now, with 108.40 being a key gauge of support for the bulls.
The doves were disappointed by the Fed decision yesterday and subsequently the dollar has strengthened along with a downside pull on gold. Although the support of the mini-range between $1411/$1433 held the initial test yesterday, there has been further moves lower early this morning to take the market to a test of the key pivot at $1400. This move requires a response now from the bulls as the market is now trading below the 21 day moving average (today at $1416) for the first time since the decisive rally kicked off in June. The outlook would deteriorate further below $1400 with the key support at $1381.50. We continue to see near term weakness is a chance to buy gold, but a breach of $1400 along with declining momentum indicators would make this outlook less certain. Below $1381.50 would be a big blow for the bulls now. The hourly chart shows initial resistance now $1411/$1416, however, the importance of resistance at $1433 has increased too.
The improvement over the past few sessions has resulted in a string of positive candlesticks and a move to a new two week high. Holding above the breakout band of support $57.30/$57.65 will be seen as important for the continued improvement. This would maintain the market on the path of recovery towards a test of the 50% Fibonacci retracement at $59.60. An early move lower this morning needs to be watched. If support can build from $57.30/$57.65 then the improvement seen across momentum indicators in the past week can be taken forward. A failure under $57.30 with a near candle too, would bring the seven week uptrend back into play (today at $56.15). Resistance is initially in place at $58.80.
Dow Jones Industrial Average
After two weeks of mild consolidation, it should come as little surprise that the Dow has taken decisive direction off the Fed. A Fed less dovish than expected/hoped for and the Dow has sold sharply lower. A big bearish engulfing has signalled for profit-taking. The follow up session following a huge candle is often an important gauge for market sentiment. Has the outlook completely changed or is it a knee jerk move that will unwind? The market closing decisively below the breakout support at 26,965 and along with the recent consolidation low of 27,069 now means this is an important area of resistance. A failure under here would be bearish. Immediately though, the support at 26,665 is important too as this is effectively the first higher low of the June/July run to all-time highs. A breach would suggest a new trend forming. Momentum indicators have turned into reverse with MACD and Stochastics lines accelerating lower, RSI below 50. Below 26,665 opens 26,465.