A dovish Fed is risk positive, however, the safe havens seem to have been the big winners. This comes as geopolitical tensions in the Persian Gulf were cranked up another notch. The downing of a US drone (supposedly by Iran) over international waters will only serve to inflame tensions between the US and Iran. There has been a spike in oil (WTI up 5.3% yesterday), with gold smashing through many years of key resistance and the Japanese yen also very strong. However, the initial knee jerk reaction of dollar weakness is beginning lose impetus as consolidation begins to set in. There are big questions left unresolved on whether the Fed will cut rates. The Fed’s concerns about inflation being slow to return to target is a key factor in its recent dovish tilt. But oil prices are spiking higher (inflationary). Also, what if Donald Trump and President Xi of China have a constructive meeting at next week’s G20? If the trade dispute recedes then, traders may be left asking what the Fed is cutting for. All those new dollar bears will be sitting rather uncomfortably to say the least. Perhaps these questions are beginning to weigh this morning as we see the dollar starting to find a basis of support. The US 10 year Treasury yield is back above 2.00% this morning. Also, interestingly, the sharp run higher on gold is beginning to unwind (already $17 off its intraday high). The run higher on equities is stalling in early moves today.
Wall Street closed strongly higher with the S&P 500 +0.9%, although US futures are slightly lower at -0.2%. Asian markets have been more cautious today, as the Nikkei fell -1.0% whilst the Shanghai Composite was around flat (+0.1%). In Europe there is a move following the US futures, with the FTSE futures and DAX futures -0.2%. In forex, the run higher on EUR and GBP is showing signs of running out of steam today as USD looks to form support although there is little real direction. In commodities, there are question marks over the run higher on gold, which although is trading mildly higher, is currently more than a percent off its earlier highs. As for the oil rally, there is a degree of consolidation this morning, with a slip back of -0.3%.
On the economic calendar, attention turns back on the prospects for Eurozone growth this morning, with the flash PMIs for June. The Eurozone Flash Manufacturing PMI is at 0900BST and is expected to show a marginal improvement to 48.0 (from a final 47.7 in May), which would be a four month high. Eurozone Flash Services PMI is expected to remain at 52.9 (52.9 in May). This means that the flash Eurozone Composite PMI is expected to remain at 51.8 (51.8 in May). The UK Public Borrowing for May is at 0930BST and is expected to be £3.3bn which would be lower than the £3.9bn in May of 2018. Into the US session, the US Flash Manufacturing PMI for June is at 1445BST and is expected to slip a tenth to 50.4 (from 50.5 in May), whilst US Flash Services PMI is expected to improve a tenth to 51.0 (from 50.9 in May). We are also looking out for US Existing Home Sales for May at 1500BST which are expected to improve by +1.2% to 5.25m (from 5.19m in April.
Chart of the Day – Silver
The rally on gold has got all the headlines, but what about silver? Coming up on gold’s coattails, there is a strong recovery forming on silver too. A small base pattern a couple of weeks ago has now developed into a much larger base on the decisive rally above $15.14 to complete a medium term breakout. With an implied target of around $0.90, a recovery towards $16.00 is building. A run of higher lows has formed a four week uptrend, whilst momentum indicators are increasingly positive now. RSI recently bounced off 50 (which had previously been a basis of resistance formation), with a move towards 70 as a strong trend formation. Furthermore, the MACD lines have accelerated above neutral and Stochastics are in bullish configuration. Intraday weakness is now a chance to buy. The breakout is supportive at $15.14 initially now (also the low of yesterday’s decisive bull candle), whilst the four week trend support is at $14.90 today (which is another long term pivot). The next resistance is at $15.63 from the March high.
The dollar has come under considerable corrective pressure since the FOMC and EUR/USD has spiked higher. A strong bull candle yesterday has added over 90 pips and completely shifted what had been an increasingly negative outlook. What we are now faced with on the technicals is a rather messy looking chart. Broken trendlines everywhere, momentum indicators fluctuating, and taking a step back, some rather neutral looking moving averages. How the pair settles as the market gathers itself in the next session or two will be important. Clearly the latest move is higher, but already on the hourly chart, this is showing signs of consolidation. Although not as relevant now, it was interesting to see the market closing under $1.1300 yesterday (this was an old pivot of note). Back above $1.1265 has certainly improved the outlook, but can the bulls sustain it. $1.1265 was a basis of support during yesterday’s session and should be watched as the hourly indicators begin to drift lower again. Initial resistance at $1.1315 under the June high at $1.1347.
As with EUR/USD, it is interesting to see that the strong move higher on the back of the FOMC is beginning to consolidate. Essentially, the outlook on Cable has improved, but no real technical breakout has been seen that would constitute a strong recovery. The resistance at $1.2760 remains intact and whilst this remains the case, there is no breach of the lower highs. The momentum indicators have ticked higher (after three bull candles) but for now looks to be just noise within the negative medium term configuration. The RSI has just unwound towards 50, MACD lines are mildly rising (but well below neutral). Only really the accelerating Stochastics are a standout positive. The hourly chart shows consolidation setting in and the reaction low at $1.2670 from during yesterday’s session is important as a gauge. The band of support $1.2650/$1.2670 will now be watched. The bulls need to overcome $1.2760 for this to be considered something more than a rally to be sold into.
A decisive breakdown through a floor of support between 107.50/107.80 just continues the downtrend channel of the past eight weeks. The market closed yesterday’s session at its lowest closing level since April 2018. Aside from minor levels at 106.60 and 105.60, there is little real support now until the March 2018 lows between 104.50/105.00. Momentum indicators come with negative configuration and downside potential. The MAC lines are crossing lower again and Stochastics are also still with downside potential. Perhaps a slight caveat on the RSI in the mid-20s (a level which prompted the May rally), however, rallies are a chance to sell. The old support band 107.50/107.80 is now a prime sell zone. The 21 day moving average is an excellent gauge for the bigger rallies, and is now falling around 108.50.
Gold has spiked higher with an accelerating run of bull candles. The move through a swathe of old key (and multi-year) highs shows how strong this trend on gold currently is. Momentum indicators remain strongly bullish on the daily chart and this is a run to stick with. The next (minor) resistance is from 2013 at $1433. However, this run higher also comes with caution too. Can the bulls sustain this sort of bullish run? Hints of profit-taking could spread, so traders should stay close with their profit-triggers. Hourly momentum remains strong but questions the longevity of the immediate upside, as the price has unwound back from $1410.70 this morning. Initial support is at $1386/$1392 and a loss of that support could signal an unwinding move. The bullish medium term outlook from the technical suggests that corrections to find support should be seen as a chance to buy still. However, building of support is now key for the bulls and their continuation. Should the rally lose impetus, there is little real support until back at $1358/$1362 (from the hourly chart). Given that the market burst through the old 2018 high (at $1366) and 2016 high (at $1377) with little real thought, can these be supportive? Watch for hourly momentum bear signals which could be the trigger.
Oil has spiked hugely higher, with a decisive bull candle through resistance at $54.85. This has completed a base pattern that implies $4.25 of additional upside towards the $59.00 area. Such a decisive move through the 38.2% Fibonacci retracement at $55.55 has opened the old 50% Fib at $59.60 as the next consolidation area. Given the strength in momentum indicators, the move has legs. Stochastics are accelerating higher, along with a bull cross on MACD and RSI above 50. The bulls need to overcome the old pivot around $57.80/$58.00 and this has been a barrier earlier this morning. The bulls will though be looking to build support with the 38.2% Fib at $55.55 and the breakout at $54.85. Corrections are now a chance to buy for this continued recovery.
Dow Jones Industrial Average
It may have been a stuttering immediate response to the FOMC, but yesterday’s session has more than made up for it. A decisive strong bull candle. Perhaps the most interesting aspect is that the bulls filled the intraday gap higher to close near the session high. Buying into weakness gives the market more of a sense of foundation for the more higher. A closing breakout above 26,695 also takes the Dow above the April high and now within sniffing distance of the all time high at 26,951. The strength of momentum, with its upside potential, also suggests the bulls now have the appetite for it. Earlier in the week we discussed a bull flag pattern, in a move that implies 27,500. If the market can move into all time highs, then this remains a realistic target. Yesterday’s low at 26,540 is a good support area now to buy into weakness.