With such an extreme shift in sentiment on bond markets in recent weeks, there is always the potential for positioning to become stretched. Whilst there are still negative data points to drag on yields, it means that signs of any positive data have a disproportionately positive impact too. This is what was seen with the positive ISM Non-Manufacturing surprise yesterday. The data caused a significant one day turnaround on yields and the dollar which had been previously reacting to the big negative surprise in the ADP employment change. The move also suggests that the market could be close to a turning point. A lot is being baked into expectation that the Fed will now begin to cut interest rates, but positive data surprises could mean a market seemingly so sure, could begin to question this prospect once more. Yields are beginning to show signs of a degree of stability. Across major forex pairs, the dollar formed some interesting one day reversal signals which suggest all is not lost for the bulls. The importance of Friday’s payrolls report is certainly growing.
The ECB monetary policy decision is the key focus for traders today. The rates decision at 1245BST is not expected to show any changes to the main refinancing rate of 0.0% with the deposit rate expected to remain at -0.4%. The big move in this meeting is likely to come with ECB President Mario Draghi’s press conference at 1330BST. There are several aspects to look out for. Firstly, the economic projections. How will the ECB respond to the escalation of protectionist trade measures which is surely to delay any prospective economic recovery? The ECB’s current economic assessment is likely to remain “tilted to the downside”. Furthermore, with this week’s inflation missing to the downside and the oil price falling sharply in the past month, will this impact negatively on the inflation projections? Slowing growth and sluggish inflation adds up to a dovish leaning ECB. Details of the TLTRO program (first revealed in March and which begins in September) could be announced. If the rates are generous then this would be euro negative and risk positive. Finally, do not expect much with regards to the prospect of tiering the deposit rate in this meeting. Recent commentary has not been favourable on this issue with Governing Council members Weidmann (potentially negative impact) and Villeroy (monetary policy has been favourable for banks). This suggests the clamour for tiering of the deposit rate is not there right now.
Wall Street closed higher for a second day with the S&P 500 +0.8% at 2826. However, this has been tempered slightly today with US futures a shade lower at -0.2%. Asian markets have been mixed to slightly negative, with the Nikkei flat and Shanghai Composite -0.9%. In Europe, the outlook is mixed with FTSE futures +0.1% whilst DAX futures are -0.1%. In forex, USD rebound of late yesterday has stalled a touch today with a mixed look to major pairs. The main mover seems to be JPY which is outperforming today and is a play on trade tensions between the US and Mexico. In commodities, there are slight gains for gold, whilst oil is steady this morning after falling over 3% yesterday on the surprise inventory build in the US.
Aside from the ECB, on the economic calendar traders will be watching for revised Eurozone Q1 GDP at 1000BST which is expected to show no change to the flash GDP reading with +0.4% (+0.4% flash Q1, +0.2% final Q4 2018). The US International Trade Balance at 1330BST is expected to show a deficit growing to -$50.7bn in April (from -$50.0bn in March). US Weekly Jobless Claims at 1330BST are expected to stick at 215,000 (215,000 last week).
Chart of the Day – USD/CHF
After a run of weeks where the dollar has been under pressure, are there hints of a turnaround? A massive bull hammer candlestick is a significant intraday bounce and is now a potential near term reversal signal. However, the move needs confirmation across indicators. The RSI ticking higher from 30 which has often limited sell-offs previously. The last couple of rebounds have unwound RSI to 45/50 so there is recovery potential. If the Stochastics turn decisively higher and MACD lines can bottom then there is scope for a rebound. However, a bull hammer needs a second positive session to maintain recovery momentum. The price had a wild intraday ride yesterday, whilst also once more failing to lose below 0.9900 (which would have been a key downside break). Another positive candle today would add conviction to a recovery move which would open the 1.0000 parity level once more. Initial resistance is around 0.9955 this morning and pulling above here with a push into the 60s on the hourly RSI would indicate the bulls gaining momentum.
A big intraday reversal lower on EUR/USD hints that the dollar negative positioning is becoming stretched near term. A bearish engulfing candle (bear key one day reversal) has changed the complexion of the chart on a near term basis. Intraday moves above $1.1265 resistance (where the market has consistently failed in recent weeks) in the past couple of sessions have been sold into. This came to a head yesterday with a sharp intraday decline of around 90 pips to close at the day low. Is the RSI going to fail again around 60? Are the Stochastics going to again bear cross just under 80? These are key medium term questions as the near term rally again shows signs of faltering. A mild early move higher this morning shows caution with positioning decisively either way in front of the ECB. However, the hourly chart shows $1.1220 has been previously a pivot area of note and is again supportive today. A close below $1.1220 today would reflect a growing sense of renewed correction. Initial resistance is still based on $1.1265.
The theme across major pairs today is of how the dollar bulls react to signs of support for the dollar. After three positive sessions, Cable posted a small “shooting star” candlestick yesterday. This is a signal of a reversal, however, at the moment this signal is fairly isolated and needs further confirmation. Momentum indicators are still ticking higher, but not surprising given the moves have been all rather benign in recent sessions (at least compared to far more decisive moves on EUR/USD). We have discussed previously about the old resistance at $1.2700 and the recent rebound high at $1.2755 making a band of resistance $1.2700/$1.2755. The rebound this week has tested this band twice and shied away to close below. Although a downtrend has been broken, the bulls are tentative still. This is reflected in yesterday’s slip back. The early move in response today is one of consolidation, but another negative candle would begin to drag on momentum again. Initial support at $1.2640 and then $1.2605.
The dollar bulls have been finding their feet in recent days and the seeds of recovery are being sown. Yesterday’s session has taken a big step forward in this prospect. A bullish engulfing candle (bull key one day reversal) is a significant reversal signal. This comes with RSI picking up above 30 again (a basis RSI buy signal) with MACD and Stochastics also showing signs of bottoming. The key resistance at 108.50/109.00 is overhead supply and the bulls are gearing up for a test. However, an early drop back this morning suggests there is an uncertainty over a recovery. The bulls need a close back above 108.50 for the prospect of at least a near term rebound to grow. However, for now this is clear resistance. If this can be cleared though, throughout May the rallies returned to the falling 21 day moving average (currently around 109.40). Initial support is at 107.80 which protects 107.50/107.75.
An intraday spike to $1343 failed just shy of the long term 2019 resistance at $1346.70 yesterday. It was a session driven by data surprises but the renewed recovery on the dollar means a drag on gold, which fell back around $14 from yesterday’s high. This is a move worth taking note of, especially if the market again closes lower today. This potential bull failure comes after such a strong run in recent sessions and if followed by a negative candle today there is a growing potential of the bull move turning lower. RSI is beginning to plateau just over 70 whilst the Stochastics are also bear crossing. A close back under $1324 would be a corrective signal. This would open a retreat back to the $1310 breakout initially and the long term pivot band $1300/$1310 which is now a basis of support. The hourly chart shows that yesterday’s move to $1343 topping out has been a negative divergence on hourly RSI and MACD lines. There is near term support at $1320.
Another negative candle yesterday has pulled the market once more back towards the key basis of support around the psychological $50 level. In November through to January, $50 was a basis of a pivot for WTI. It is also an area around the 23.6% Fibonacci retracement of $76.90/$42.35 which is a basis of consolidation now at $50.50. Yesterday saw the market bounce from $50.60, so is clearly a level the market will keep an eye on now. The bears are in control with this sell-off, which is now in bear market territory (-22% from the April highs). RSI is falling in the low 20s reflects a decisive bear trend and intraday rallies remain a chance to sell for pressure towards $50/$50.50. The bulls need to start testing higher. Initial resistance is $52.30 this morning, but $53.40 is yesterday’s high and would be a signal of improvement if this were to be overcome.
Dow Jones Industrial Average
There has been a big positive reaction in the past couple of sessions. The big question is whether the rebound is just another opportunity to sell, or something more considerable for a recovery. The bulls have put together two strong sessions, with both candlesticks closing towards the day high to add over 700 ticks (just shy of 3%). This move has broken the four month downtrend. However, we now see momentum at a crossroads. RSI is back just under 50 (where the mid-May rally failed), with MACD lines threatening to bull cross. Resistance at 25,717 is the first real hurdle for this rally, with 25,958 the first key lower high. These will be the key barriers. There is gap support open at 25,343 with the neckline at 25,210 now a gauge of support. Previous rallies have faltered after two or three sessions in recent weeks, so this is now a key phase for the bulls.