There has been a decisive move on major markets in response to what can be nothing more than an unambiguous dovish shift in monetary policy from the Federal Reserve. Since the December hike of 25 basis points, the rhetoric from FOMC members has been leaning far more cautious and speculation has increased that the Fed may possibly have raised interest rates for the final time. Yesterday’s policy announcement suggests that the Fed is increasingly cautious (a tone reflected in Fed chair Powell’s press conference), with an emphasis on being “patient” and removing a bias for “further gradual” increases in rates. Powell cited economic slowdowns in China and the Eurozone, the uncertainty of Brexit and concerns over the impact of further Government shutdowns. The Fed is seemingly on hold for March, which would break its sequence of hiking at every other meeting. The reaction on markets has been yields negative, dollar negative and equities positive. This move seems to still be in the market this morning. Upside breaks on Wall Street markets, gold and the euro testing key medium term resistance around $1.1500 are notable moves. Those out there (and we count ourselves amongst them) that are calling for a corrective dollar in 2019 have been boosted in their assertion.
Wall Street closed decisively higher in the wake of the Fed with the S&P 500 +1.6% at 2681, with futures ticking mildly higher again today by around +0.1%. This has helped Asian markets higher (Nikkei +1.0%, Shanghai Composite +0.3%) with the European markets positive in early moves (FTSE futures +0.2% and DAX futures +0.5%). In forex, there is a continued dollar weakness through major pairs, with all gaining around +0.2% on the greenback currently. In commodities, there is a consolidation on the breakouts on gold and silver, whilst oil is continuing to hold ground in yesterday’s upside break around half a percent higher.
Traders will be looking out for the first look at how the economic activity of the Eurozone performed in the final quarter of 2018, with the Eurozone Flash Preliminary GDP at 1000GMT. The Q4 growth is expected to be +0.2% which would drag the year on year growth down to +1.2% from +1.7% in Q3 2018. Eurozone Unemployment is also at 1000GMT and is expected to remain at 7.9% (7.9% in November). US core Personal Consumption Expenditure is pencilled in for 1330GMT (although given the data disruption this is no guarantee) and is expected to be +0.2% on the month and remain at +1.9% year on year in December (+1.9% in November). US Weekly Jobless Claims are at 1330GMT and are expected to increase to 215,000 (although this was from 199,000 last week, the lowest reading since 1969). The Employment Cost Index is also at 1330GMT and is expected to remain a t+0.8% in Q4 (+0.8% in Q3).
Chart of the Day – EUR/CHF
There has been a decisive breakout in recent days which has suddenly seen a decisive shift in the outlook on Euro/Swiss. For months the market has been struggling under the resistance of a pivot at 1.1350, but the move has been gradually building before a decisive breakout on Tuesday. This move has seen a close above 1.1350 for the first time since mid-November, whilst the momentum indicators are decisively confirming the move. The RSI has struggled previously around 60, but this week has pushed above 60 to its highest level since October, whilst the MACD lines are now accelerating above neutral and the Stochastics are positively configured. This all points towards buying into weakness now, with the pivot at 1.1350 a prime basis of support now. A second bullish candlestick on the breakout has really confirmed the break and is now eyeing initial resistance at 1.1435 and the November high of 1.1470. The strong configuration is reflected on the hourly chart with any move that unwinds the hourly RSI towards 50 being a chance to buy.
The bulls have taken off again after the dovish Fed meeting. EUR/USD has now posted four positive candles in a row and the market is once more up to testing the top of what has been resistance for the past few months. Since early November, any rally towards $1.1500 has been subjected to profit taking around $1.1500. Will this time be any different? This tie, momentum indicators come into the test recently turning higher from bullish configuration (a MACD bull cross at neutral) with renewed upside potential (on both RSI and Stochastics). Previously any move above $1.1500 has only lasted briefly (one closing breakout at best) before dropping back below, so the bulls will be looking for multiple closes above $1.1500 and a breakout above $1.1570 (the early January high). Otherwise the market will simply succumb once more and the profit takers will drag the market back towards initial support $1.1420/$1.1450.
Certainly helped by a dovish Fed, but Cable seems to have settled fairly successfully in the wake of its wobble during the early part of the week. This support at $1.3055 with a positive candle yesterday, has helped to hold on to a four week uptrend. This is all taking place above recent breakout levels, at $1.3000 (mid Jan high and psychological), and $1.2920 an old pivot. Momentum remains strong with the RSI settled above 60 MACD lines still positively configured and Stochastics above 80. Holding on to $1.3055 will be important for the bulls now, but Brexit developments need to be watched. The other issue for the bulls is that resistance is mounting at $1.3200/$1.3215, but if this can be broken then it opens the way for $1.3260/$1.3300.
It was interesting to see the fluctuations on Dollar/Yen yesterday, but ultimately it was a dovish Fed that really did for the bulls. A sharp move to the downside and importantly below the support at 109.10. This is a mini breakdown and effectively implies 90 pips of downside towards 108.20. The negative candles are also now beginning to rack up as the market has rolled over in the past week. The momentum indicators are also deteriorating now with the RSI, which had failed under 50 now below 40, the Stochastics accelerating lower and the MACD lines plateauing under neutral. This is all a fairly concerning set up for the dollar bulls. The daily chart shows support between 107.75/108.00 as the next real floor. The breakdown support at 109.10 is now a basis of resistance, which is already building as shown on the hourly chart with overhead supply between 109.10/109.20.
The push above $1310 in recent days has been a key development in the continued recovery. Closing above the $1300/$1310 long breakout is a significant signal and opens the way for further gains in 2019 towards the $1366 key resistance (the April 2018 high) in the coming months. Within this, corrections will be a chance to buy and the break above the $1300/$1310 pivot now means this is a prime area for opportunities. For now though another strong bull candle shows the strength of the buying pressure for now. Momentum indicators are strong and this is showing with the RSI above 70 (this is a positive sign in a trending market), the MACD lines crossing higher and the Stochastics above 80. Initial resistance is at $1326 (the May 2018 high) but beyond there the way is open for $1366. The importance of $1276 as support is increasing on a medium term basis, but any move to unwind gold back towards $1300/$1310 is now a chance to buy.
Oil was boosted yesterday primarily by the EIA inventories showed crude stocks building less significantly than expected. This allowed WTI to post a second successive solid positive candlestick which is now threatening the next upside break. This move looks to be ready to continue for the next push higher and end what has become a consolidation of recent weeks. However, despite the consolidation, there has been a mild upside bias that has been helping the price edge higher. It is now interesting to see the market setting up for a close above $54.25 to multi-week highs, but the test of $54.75 would be crucial. From a technical perspective, a closing move above $54.75 would complete a big nine week “head and shoulders” base pattern. This would be a really positive breakout that would open for a far more significant recovery in the coming weeks, with a potential $12 recovery target. For the nearer term a close above $54.25 implies $3.85 of range breakout (towards $58 which is a long term resistance). This breakout would be confirmed if the RSI pushed decisively into the 60s. The Stochastics are ticking higher again whilst MACD lines are also edging positively now. It would leave $51.35 as a key higher low and the importance of the support at $50.40 would be significant.
Dow Jones Industrial Average
A dovish Fed has completely changed the outlook once more. The market looked to be teetering for the past week as a series of negative candlesticks was racking up, however, a big gap higher and a push through to the highest level since early December means that the bulls are back in the driving seat once more. The push from the 50% Fibonacci retracement level (and increasingly important support) at 24,333 to close above the 61.8% Fib at 24,950 now opens the prospect of 76.4% Fib at 25,715. Momentum indicators are strongly configured still with the RSI into the low 60s and MACD lines accelerating higher. There is a gap open at 24,675 but another positive session today will leave 24,860 as a breakout support. Having closed above 25,000 the next key resistance is at 25,980.