As traders wait for further news of solid developments in the US/China trade negotiations there has been a reduction in risk appetite and a cautious look to trading. There has been a marked decline in US Treasury yields, equity futures are in decline with a continued stronger dollar being slightly outperformed by safe havens such as the yen and gold. A disappointing print on Australian growth which has added to this air of caution overnight. Coming in the wake of the downward revision to Chinese growth expectations for this year, this plays into the outlook for continued global cyclical downturn. Furthermore, a stronger performance of the US dollar comes as the relative strength of the US economy continues to be laid out by the data, with the ISM Non-Manufacturing data significantly surprising to the upside yesterday. The strength of the Chinese yuan has become an interesting gauge for risk appetite, and for now the yuan has turned corrective, falling to an eight day low against the dollar.
There was a drift lower on Wall Street last night as the consolidation of the past week continues. The S&P 500 closed -0.1% lower at 2790 with US futures falling -0.2%. This has put Asian traders on the back foot, with the Nikkei -0.6% whilst the notoriously volatile Shanghai Composite continues to rally +1.6%. European markets are set to take a more cautious approach today with both FTSE futures and DAX futures around -0.2% lower. In forex trading there is a safe haven bias to majors, with the Aussie being the big underperformer down -0.7% whilst sterling is also on the slide -0.3%. The yen is stronger and broadly the US dollar is also making further ground. In commodities, the risk negative vibe is also being seen, with gold a touch higher, whilst oil is -0.7% lower to continue the recent consolidation.
There is nothing in the economic calendar to impact on the European session until the ADP Employment change at 1315GMT which is expected to drop back to 188,000 (from 213,000 last month). The US Trade Balance which is expected to see the December trade deficit deteriorate once more back to its widest for 10 years at -$57.8bn (-$49.3bn in November). The Bank of Canada monetary policy at 1500GMT is not expected to show any shocks in standing pat at +1.75% whilst the EIA Oil Inventories are expected to show crude stocks building again by +0.6m barrels (after a surprise inventory drawdown of -8.7m barrels last week, with the distillates expected to drawdown by -1.0m (-0.3m last week) and gasoline in drawdown of -1.9m (-1.9m last week). The Federal Reserve’s Beige Book is released at 1900GMT. There are also some central bankers to watch for with the FOMC’s John Williams (voter, centrist) at 1700GMT whilst for the Bank of England there is John Cunliffe at 1215GMT and Michael Saunders at 1730GMT.
Chart of the Day – AUD/USD
The RBA did little to shift the outlook for the Aussie whilst disappointing growth numbers have also increase the pressure this morning and is now on the brink of a key downside break. The market has seen little direction during a phase of consolidation throughout early 2019, but the support of the February low at $0.7055 has been breached and the market is testing the key old support at $0.7020 which will now be seen as a key gauge. A close below $0.7020 would be a key break. Momentum outlook is deteriorating, with the MACD lines having just crossed lower under neutral, whilst the Stochastics are falling into bearish configuration and RSI is falling into the 30s. The hourly chart shows a consistent corrective configuration in the past week, with a downtrend of lower highs which have left resistance at $0.7095. The hourly RSI is failing in recoveries around 50/60 whilst the hourly MACD lines are consistently under neutral. This suggests consistent selling into strength now, with near term overhead supply around $0.7060. It would take a move above the pivot around $0.7120 to improve the outlook now. A move below support at $0.7020 open the old key low at $0.6825.
It is crunch time again for the euro. The euro has begun to struggle again in the past few days as the dollar has regained momentum. This comes with two consecutive decisive negative candles which have taken the market back to test the support around $1.1300 again. There has been a big support area around and just below $1.1300 on numerous occasions since August 2018, however, this time, the market drops into the support in a far less positive set up. The MACD lines are just crossing lower under neutral, whilst the Stochastics are accelerating lower with downside potential. A close below $1.1300 today with another decisive bear candle would really put the pressure on what could be a move back towards the key medium to longer term lows at $1.1215/$1.1230. The bulls are struggling, with the hourly chart showing consistent lower highs and lower lows. Old support is now new resistance, with $1.1350 from yesterday and overnight $1.1310/$1.1320 forming resistance. Can the bulls once more gather themselves for a recovery? A move above $1.1350 is key near term.
Sterling is under corrective pressure against a resurgent dollar. This is dragging Cable lower, however the sterling bulls are still fighting to defend this move. Yesterday’s doji candle (open and close at the same level) rallied 80 pips off the low into the close. The rebound came off support around the $1.3110 mark and suggests that this is a move that the bulls are now quite willing to give in to. Although the market is lower again today, the move is into a band of support from old breakouts now and given the renewed positive outlook on sterling over the medium term, this still looks to be a retracement move into support rather than the beginning of a deeper correction. There is an old pivot around $1.3050 and the breakout support at the psychological $1.3000 which is underlying. Momentum indicators are drifting back with the slip lower of the past week, but this underlying support between $1.3000/$1.3110 will be key now. The hourly chart shows this to be a drift correction (hourly RSI above 30) within a downtrend (which falls around $1.3180 this morning). The bulls need a move above $1.3200 to regenerate the stronger sterling outlook.
The move higher is just stuttering slightly around the top of the uptrend channel. The past few sessions has seen the bulls just take their foot off the gas as the resistance around 112.25 has approached. There is little reason to believe this is anything other than a pause within the move higher and even if there were to be a slip back to the pivot support at 111.35 this would still be a chance to buy. Even a move back to the latest breakout support around 111.00 would be good. There is strong configuration on momentum indicators and intraday weakness is an opportunity. The hourly chart shows an unwind on momentum has already taken place near term with support initially around 111.65. A close above 112.25 opens 113.70.
With the selling pressure just dissipating yesterday there is a degree of support that has formed on gold. A slight positive candle has also been followed by a rebound this morning to leave a low at $1280.70 which is crucially above the $1276 key reaction low. How the market responds to this support will be key, as there is now a process of building support. However, the old key levels between $1298 and $1302 are now big resistance, not to mention the $1300 long term pivot which is also a barrier. The bulls will need to recover back through these levels to engage in a serious recovery. The momentum indicators are still correctively configured, with the RSI is now below 40, whilst the Stochastics are now fully in bearish territory and MACD lines are accelerating sharply lower. The hourly chart shows a consistent run of lower highs and lower lows forming, so a move above the initial barrier at $1290 is encouraging. Also the hourly RSI pushing above 60 and MACD lines above neutral will help to build confidence in the support holding. A consolidation between $1276 and $1302 could be forming.
The consolidation of the past couple of weeks between $55.10/$57.90 still looks to be a move simply to unwind stretched momentum and renew upside potential. Holding this consolidation and support around the 38.2% Fibonacci retracement at $55.55 suggests the bulls maintain control of the recovery. However, the uptrend of the past ten weeks which is now supportive at $55.80 and is above the Fib level, meaning this raises the prospect of this uptrend being broken by a continuation of the consolidation now. The trendline is being tested by the early weakness today. Momentum is still positively set up to suggest near term weakness remains a chance to buy even if the trend line is breached. The bulls will remain in control whilst the support around $55.00/$55.55 is intact. Initial resistance of $57.20 now comes under the medium term pivot at $58.00. It is wait and see mode for now, but there is nothing to suggest yet that the next move will not be to the upside.
Dow Jones Industrial Average
For the past few days there has been a growing concern that the Dow is at best in drift mode, but could be developing an element of fatigue in the rally. The number of daily candlesticks which reflect a lack of conviction or negativity, is growing. In the wake of the big bearish engulfing candle, a small bodied negative candle, which again suggests the bulls are not interested for now. This is still all playing out as consolidation of the 76.4% Fibonacci retracement is a basis of support at 25,715. For now, this is all OK, but if the bulls were to wilt further and closing bear candles were to drop below the Fib level then momentum in a correction could begin to grow. The indicators have already turned lower and are threatening such a move but are as yet not too corrective and more reflect the drift of the past week. Monday’s low at 25,610 should be watched as a gauge, especially on a closing basis now. The hourly chart shows a slight shift into a more corrective configuration with hourly RSI failing under 60 and MACD under neutral. If this continues then the bulls will continue to struggle. Resistance at 26,155/26,240.