The dollar remains subdued as the Federal Reserve meeting approaches. Given the recent run of disappointing US data, the market is taking a view that the Fed is set to tread a patient path through 2019 and is likely to cut its economic forecasts at its March meeting. This has been a drag on Treasury yields and means that yield differentials are driving a mild dollar underperformance. The market is anticipating a dovish Fed and whilst this leaves the door open to a hawkish surprise, in the meantime and with little data of any note that would likely change the tone, there is a negative drag on the dollar. The soap opera of Brexit continues to leave the markets on a knife edge, with the latest move to thwart Prime Minister May’s attempt to blackmail MPs into voting for her deeply unpopular deal. The latest twist came yesterday as House of Commons Speaker Bercow waded in (to be fair he hasn’t made it all about him for a while, so we were due one) and judged that Mrs May could not bring back her deal to be voted on for a second time in its current format (in reality this is the third time). This puts a pin into the plans for May’s Meaningful Vote 3 (MV3), for this week at least. So it is now over to the EU Council to decide on whether to extend Article 50 this week. For their part, UK Gilts and sterling remained remarkably steady at Bercow’s decision, with the feeling that the risk of a no deal Brexit remains limited.
Wall Street closed positively once more yesterday with the S&P 500 another +0.4% higher and consolidating the breakout to multi-month highs, closing at 2833. US futures are just building slightly on these gains, with another +0.1% today. There was more of a cautious look to Asian markets overnight, with the Nikkei -0.1% and Shanghai Composite -0.3%. European markets are also looking circumspect in early moves today, with the FTSE futures and DAX futures broadly flat. In forex, the dollar continues to slip, with an underperformance across the majors, whilst almost everything else is flat aside from a mild underperformance on the Aussie after disappointing housing data. In commodities there is also a mixed look, with gold around a tenth of a percent higher, silver slightly weaker, whilst oil is a shade positive.
The “will they, won’t they” over the potential for a third meaningful vote on the Brexit deal will continue in the next few days, so focus turns to the economic calendar and first up is the UK employment data for January. UK Unemployment is at 0930GMT and is expected to remain flat at 4.0% (4.0% in December) with UK Average Earnings expected to slip back a shade to +3.2% (from +3.4% in December). The German ZEW Economic Sentiment for March will impact on the euro as it plays into the health of the German economy, announced at 1000GMT which is expected to improve for a fifth consecutive month to -11.0 (from -13.4 in February). US Factory Orders for January are at 1400GMT and are forecast to grow by +0.3% on the month (+0.1% in December).
Chart of the Day – AUD/NZD
Within the big downtrend that has been in place since August, there has been a sharper downtrend of the past six weeks, which has on numerous occasions been the basis of resistance. With the old support band 1.0430/1.0450 being a basis of resistance in late February, now we are seeing the old crucial Q2 2017 lows (and also recent February lows) of 1.0365 now becoming the basis of resistance in the past week. The confluence of resistance with the sharper six week downtrend means that the market is seeing this as a chance to sell for the next leg lower. Momentum indicators are deeply negatively configured, with the RSI and Stochastics again failing, whilst the falling 21 day moving average (today at 1.0385) has been flanking the move lower. With the rebound struggling for headway around the confluence of resistance, expect the Kiwi to continue its outperformance and drag the market back to retest last week’s low at 1.0290 and then the 1.0235 low from 2016 in due course.
There is a tentative move higher on the euro after another positive close yesterday. However it is not a move with any huge conviction, at least for now, with yesterday’s candlestick showing a close 25 pips back from the high. Despite this air of caution, there is another positive open to today’s trading and momentum indicators continue to edge higher. The RSI is now around the level where it failed during the February rally, whilst Stochastics are ticking higher above neutral. The hourly chart is positively configured to buy into near term weakness, but the pace of the recovery is slowing a touch as the eight day uptrend is beginning to wobble. A decisive move clear of $1.1350 would test $1.1395 but the real resistance is the February reaction high and pivot at $1.1420 which needs to be broken for the recovery to be considered sustainable. Support at $1.1320 and then $1.1275/$1.1300
For sterling moves of the past few weeks, the current run is actually a fairly settled market on Cable. For a brief moment yesterday it looked as though a breach of $1.3200 would usher in another corrective phase but an instant reaction has effectively held on to the support f the past few sessions (now a support band $1.3180/$1.3200) and the market has again settled back into a consolidation phase between $1.3200/$1.3300. Momentum indicators on the daily chart are reflecting this with the RSI, Stochastics and MACD lines increasingly benign on a near term basis, but maintaining their positive bias. There is now getting away from the fact that Brexit newsflow is the main driver of sterling and subsequently a big fact in Cable right now. The state of limbo seemingly now (at least until the EU-27 decide on an Article 50 extension) is being reflected now on the charts. The hourly indicators are flattening and being neutralised. Closing above $1.3300 opens $1.3383 again, with the support at $1.3200, $1.3150, $1.3050 and key at $1.3000.
With the dollar bulls having relinquished control in the past few sessions, we see a drift back once more on Dollar/Yen. The shorter uptrend of the past five weeks is now being tested (comes in today at 111.15). Throughout the past six weeks, the rising 21 day moving average has also been a basis of support (coming in at 111.25 today) so these are being directly tested now. The momentum indicators are still positively configured, but given the test of the trend there is a slip on momentum and this could quickly turn sour. The support at 110.75 is key in all of this. A closing break would really shift the sentiment to a corrective one again. The hourly chart shows a resistance band 111.45/111.60 needs to be breached to allow the bulls more confidence, with 112.10 increasingly important overhead.
Gold has ticked back above $1300 once more but as yet remains just shy of a breakout through the long term pivot resistance at $1310. This means that for now the outlook for gold remains somewhat clouded. Given that momentum indicators are still hovering around neutral points, and the price is inside the $10 pivot band $1300/$1310, there is little conviction of note. A decisive close above $1310 would change this for the bulls and after two completed sessions of mildly positive candlesticks and a decent open today, there is a slight positive bias. Support initially at $1298 as shown on the hourly chart (yesterday’s low) will also be a gauge in the perception that this is a marginal higher low. However, realistically the support at $1292.50 and the pivot at $1290 are far more important. Above $1310 would quickly result in a test of $1316 which is an old pivot, but can this resistance be decisively breached?
Another positive session yesterday where the market used the breakout of the pivot at $58.00 as a basis of support means that the bulls continue to gain in confidence. The next test is now the 50% Fibonacci retracement of $76.90/$42.35 at $59.60 which could be seen as a near term consolidation point. However, the move above $58.00 completed a small range breakout and implies $3.50 of upside target towards $61.50 in the coming few weeks. The strength of the momentum indicators (RSI in the mid-60s, Stochastics strong above 80 and MACD lines edging higher) suggests buying into weakness is still the strategy. There is a band of support $57.50/$58.00 as a near term buy zone with the old resistance of the breakout becoming a basis of support now. The next real price resistance is not until $63.60.
Dow Jones Industrial Average
Another positive session on the Dow with a positive daily candlestick pattern and the market continues to edge back higher once more. Momentum in the run continues to improve with the RSI now into the 60s, Stochastics rising above neutral and MACD lines flattening above neutral. Trading clear of the 76.4% Fibonacci retracement at 25,715 has now freed the bulls to look higher once more and the February resistances are next up, with 26,155 and 26,240 in sight. Intraday corrections are being used as a chance to buy with the hourly chart momentum positively configured and an initial support at 25,785. There is subsequent support at 25,570 with the key reaction low at 25,208.