The uncertainty of how the Federal Reserve will lay out its stall on Wednesday will keep traders pensive over the next couple of days. However, we continue to be provided with evidence to say that the US economy is a relative outperformer. Subsequently, we still see any move to cut rates by the Fed will likely be precautionary with little need for an aggressive series of cuts. There are questions surrounding how many rate cuts are being priced in and whether it is too much. Friday’s solid Q2 Advance GDP print came in ahead of expectations, driven by firm levels of consumer spending. It means that tomorrow’s Consumer Confidence data will take on added importance to see if this trend will continue. However, a renewed trend of dollar outperformance is pulling on major markets and shows little sign of reversing ahead of the Fed meeting on Wednesday. EUR/USD is again eyeing key support, with Cable this morning breaking down to multi-year lows. On a day bereft of data, traders still have plenty to ponder for the days ahead. The resumption of the US/China trade talks will also be sure to feature.
Wall Street closed higher once more on Friday with the S&P 500 +0.7% at 3025. US futures are a shade lighter (-0.1%) and it is interesting to see the Nikkei slightly lower (at -0.4%) and the Shanghai Composite weaker by -0.2%. In European markets, the prospect of FTSE outperformance is elevated by a weaker sterling. FTSE futures are +0.1% with DAX futures -0.2%. In forex, the run of USD outperformance is threatening to continue, although essentially markets are looking for direction and are fairly steady as the European session takes over. Further weakness on GBP is a fairy standard feature now as traders respond to more chatter over the weekend from leading Government officials about a “no deal” Brexit being a most likely outcome. In commodities, there is consolidation on gold and oil.
There are no key data releases on the economic calendar today.
Chart of the Day – DAX Xetra
The massive bearish engulfing candle (bear key one day reversal) in the wake of the ECB meeting has had a profound impact on the chart. However, the bears have not grasped decisive control quite yet. In fact the bulls looked to fight back on Friday and the pivot of 12,440/12,465 is now a key gauge. If the bulls can reclaim this pivot which is now a basis of resistance again, then confidence will build that this knee jerk reaction lower has already played out. Momentum indicators still retain their positive medium term bias but are somewhat mixed into the new week. The sensitive Stochastics rolling back over are the main driver lower. The bulls will also be looking to defend the support of the spike low at 12,299 in order to build a renewed basis of support.
After the volatility of last Thursday, the recent trend lower seems to be reasserting once more. With another negative candle on Friday, the pressure is once more growing on the key support band now at $1.1100/$1.1110. Momentum is negatively configured, with the RSI struggling at a two month low in the mid-30s, whilst MACD lines continue to slide deeper into negative territory. The importance of the resistance band from the overhead supply between $1.1180/$1.1200 is growing, but even intraday rallies are a chance to sell. This is a feature of the hourly chart indicators for the past few weeks and means that Friday’s high at $1.1150 is a lower gauge of resistance. A closing breach of $1.1100 opens $1.1000, with $1.0850 the next key support area.
Intraday rallies on Cable are a chance to sell. A decisive negative session on Friday increased pressure on the key $1.2380 support, but this seems to be breaching today. With the market now back at its lowest level since April 2017, a breach of $1.2350 leaves very little support until $1.2100. The low $1.20s certainly seems on now. Given the negative configuration on momentum, which is again deteriorating further with downside potential, the outlook is fairly bleak for the bulls right now. The downtrend of the past four weeks is a gauge of a potential rally limit (today around $1.2490). It would take a huge effort (or massive short covering rally) and a move above $1.2560/$1.2580 to make any realistic prospect of recovery sustainable.
The dollar bulls held on to their improving outlook on Friday as they continue to eye the key resistance at 109.00. In the past couple of months, the market has formed a range of around 225 pips under what is now a key pivot at 109.00. As the market has rallied in the past week, momentum has improved back towards levels where the market has struggled in recent months. Given the market is again beginning to show signs of stalling, this is an important move in the next couple of session. Since April, when the market topped out, the RSI has struggled around 60. So a decisive move into the 60s would be a really strong signal for the bulls gaining traction. So the resistance at 109.00 remains a key barrier for now. Stochastics and MACD lines ticking higher reflects the improving prospects. The hourly chart shows breakout support initially at 108.35 with a pivot band 107.80/108.00.
The market has settled well in the wake of a wobble on the ECB. The mini range of just over a week has been expanded out slightly to $1411/$1433 but essentially the consolidation continues. However the strong near to medium term outlook for the bulls has taken a hit in the past couple of days as the support of the six week uptrend has been breached. Despite this though, this consolidation is setting in for a crucial FOMC meeting this week. Technical momentum continues to drift back in an unwinding move, something which will serve the bulls well if they come out on the right side of the Fed (i.e. dovish lean). We continue to view the support of the pivot at $1400 as being a key gauge for the market. A closing move outside the $1411/$1433 range would help to provide some direction near term. We continue to view weakness as a chance to buy for eventual moves above the $1452 multi-year high.
The market has seen some fluctuations over the past five weeks, finding periods of just over a week or so, where the market will trend one way and then the other. However in the past week there has been a period of consolidation that has neutralised the market. Very small real bodies to the daily candlesticks have become the norm and there is very little to really take from momentum indicators now. With RSI flat, MACD lines neutrally configured and even the sensitive Stochastics somewhat stagnant, there is little conviction on the charts right now. Support at $54.70, with resistance at $57.65. A breach of either of these levels on a closing basis would help to general some sense of direction, but for now consolidation. We wait for a catalyst.
Dow Jones Industrial Average
The bulls are not having it all their own way at the moment. The uptrend of the past six weeks has now been breached as the consolidation of the past two weeks continues. For now this is still likely to be a pause in the bull run, but momentum indicators need to be watched. The MACD lines are the main concern, having bear crossed. However, whilst the Stochastics hold up and the RSI remains above 60, the outlook will remain fairly positive still. The bulls will be fairly content whilst the support of the breakout at 26,965/27,069 remains intact. The configuration of the hourly chart also suggests this is a fairly benign consolidation for the time being. Resistance is building in a band of around 100 ticks between 27,298/27,399.