Coming into what could be another crucial week, there is a mixed look to majors markets. With such a vast array of factors to consider in the coming days, it is little wonder that traders seem to be a little betwixt and between today with several markets at key crossroads. The move to temporarily end the US Government shutdown hit the dollar hard on Friday and there is only a minor degree of settling down today. However, given the importance of the trade discussions between the US and China on Tuesday/Wednesday at the same time that the FOMC meets for the first time this year, the coming days could be pivotal. And this comes with EUR/USD at a near to medium term pivot at $1.1420, gold at its long term pivot band $1300/$1310 and the US 10 year yield rising back towards its pivot at 2.80%, this is an important moment for direction. Add in another key week for the direction that Brexit could take (Euro/Sterling is also back to a key level) and we could be in for a crucial few days ahead. A dovish steer from the Fed along with positive signs from the US/China trade discussions and the dollar correction could finally be about to gain traction.
Wall Street closed higher again with the S&P 500 +0.8% at 2665, however with futures dropping back this morning (by around -0.4%) there has been a mild slip back on Asian markets (Nikkei -0.6%, Shanghai Composite -0.2%). European markets are also slight weaker in early moves, with FTSE futures and DAX futures both around half a percent lower. In forex, the huge moves against the dollar from the euro and sterling are seeing some slippage this morning, however, the slightly corrective risk position is helping the yen stronger, whilst the rebound from the Kiwi is the strong performer of the morning. In commodities, the huge run higher from Friday is just seeing some consolidation on gold and silver, whilst oil is -1.3% initially after the US rig count jumped for the first time this year on Friday.
It is very light on the economic data front, but there will be the ECB President Mario Draghi’s testimony to the EU Parliament at 1400GMT. Draghi is likely to play a similarly cautious line as he did at the ECB meeting last Thursday.
Chart of the Day – EURGBP
The acceleration of sterling strength has been pulling Euro/Sterling sharply lower over the past couple of weeks. This move has pulled EUR/GBP below a number of key supports at £0.8800 and £0.8690, however the April 2018 low of £0.8620 seemed to hold as a floor. This is a crucial basis of support of what is effectively an almost 500 pip range over the past 16 months. Can sterling continue to strengthen at this stage to break the range? Friday’s candlestick was interesting as although an early dip was bought into at £0.8615, there was still a lack of conviction which resulted in a negative candle. Much still needs to be done to prevent further weakness. There was an old key area between £0.8690/£0.8720 which had consistently been a basis of support on almost every corrective move through late 2017/early 2018 (other than August 2018) and so will now be an area of overhead supply. Will this be a rally that is simply sold into? The momentum indicators are deeply negatively configured but are also stretched with the RSI below 30 in a range play. How the bulls respond to a technical rally will be key. A failure under £0.8720 would simply be another chance to sell to put pressure on £0.8620, with a closing break being a crucial development.
After what happened on Thursday, the rebound on Friday was remarkable and now has the potential to completely shift sentiment once more. It looked as though the euro was under serious and increasing pressure but the old support at $1.1300 once more found buyers willing to defend and a sharp rally set in. Interestingly, the pivot around $1.1420 capped the rally and remains what is currently a basis of resistance. How the market responds to this pivot today could be key for the outlook. The momentum indicators are looking to pick up, with a cross higher on Stochastics and RSI back at 50. The MACD lines are more steady than anything though and reflect the key crossroads now at on the euro. With hourly momentum beginning to roll over this morning initial support at $1.1380/$1.1400 will be watched.
Another sharp acceleration higher for Cable on Friday has taken the market through the next level of resistance at $1.3175 to its highest since October. With a close above $1.3200 the next level of resistance is $1.3260/$1.3300. There is clearly a link between the politics of Brexit and sterling performance, but the momentum of this run higher is incredible now. The RSI is around 70 and the highest since September (when the market hit $1.3300), whilst MACD lines and Stochastics are also extremely strong. The hourly chart shows support at $1.3060/$1.3140 and intraday weakness is seen as a chance to unwind and an opportunity to buy. An uptrend of the past few weeks comes in at $1.2960 today and breakout support is $1.2920/$1.3000.
Over recent sessions we have been discussing about the loss of upside impetus in the dollar rally, and it is interesting to see the market again failing on Friday in the pivot band 109.75/110.00 to leave a negative candle set up. This move has continued into the new week as an early slip back on the dollar is now seeing positive momentum indicators beginning to deteriorate. This now means that the breakout above 109.10 from a couple of weeks ago taken on considerable importance. On the hourly chart the market has been ranging for the past week, but the deterioration in momentum showing on the daily chart (RSI failing under 50, Stochastics threatening a bear cross), is also threatening on the hourly chart too. Trading under a clutch of deteriorating hourly moving averages, momentum is suffering now and the support at 109.10 is key. A decisive break under 109.10 (realistically a 108 handle) would complete a breakdown (implying 90 pips of further correction) but also a shift in sentiment.
The huge run higher on Friday came almost out of nothing. Now with the resistance that had been in place for weeks at $1298 breached, the crucial long term pivot band $1300/$1310 is the key test. The reaction to the huge bull candle will be key today. Can the bulls sustain the breakout? Suddenly we see a sharp surge in positive momentum, forming a bull cross on Stochastics and picking the RSI above 60. There is now a band of support between $1296/$1298 for the bulls to work from. How the market now deals with the huge long term resistance band $1300/$1310 will be key. A closing breakout opens $1365.
Although oil barely took part in the strong risk rally/dollar correction of last Friday, the mild positive bias within its recent consolidation remains on course. A small positive candle has pulled WTI back higher towards $54.25/$54.75 resistance. The positive configuration on momentum indicators reflects the market edging higher within the uptrend. The support at $51.80 is taking on more of an important role in this rally now, but the key support remains at $50.40. Intraday corrections remains a chance to buy. However, the one caveat is the slow progress of the run higher, which is now putting strain on the uptrend of the past five weeks. But this does not necessarily imply an imminent correction. It does though increase the importance of higher lows, with the recent support at $51.80 needing to remain intact to maintain the recovery.
Dow Jones Industrial Average
After a few days of uncertainty, the bulls were back in control on Friday to close another week higher. Momentum indicators remain positively configured and the outlook continues to be on to buy into weakness. The RSI is pushing into the 60s now, with the MACD lines rising above neutral and Stochastics strongly positioned. The move decisively clear of the 50% Fibonacci retracement at 24,333 means that 61.8% Fib at 24,950 is next in line. This also leaves strong support now in the range 24,000/24,333. There is a small gap open at 24,626 which needs filling, with resistance initially at Friday’s high of 24,860.