The wild ride on Wall Street continued yesterday as the beaten down tech sector found support for a rebound. The question will now be how sustainable is this support and whether the recent sell-off is over. The impact on broader sentiment has been significant too. A dollar rally has coincided with the recent tech sell-off, however, now with tech (and Wall Street) rebounding, we see the dollar coming off again. This is being seen through major forex, whilst gold has also ticked higher. The focus for today will again be on the path of US futures, but also looking towards the ECB policy decision. A rebound on the euro came yesterday on reports that ECB members were confident of the Eurozone economic outlook, however, will this be the stance of ECB President Lagarde today. How does the ECB react to the record low on core inflation? Also what of the strength of the euro, which induced ECB chief economist Philip Lane to concern over its impact on the Eurozone economy? There is a sense of consolidation early today. How dovish the ECB comes across will likely be another driver to the next EUR and by association USD move.
Wall Street finally started to build support again yesterday, with a rebound (tech driven) which filtered across markets. The S&P 500 closed +2.0% higher at 3399 whilst futures are ticking higher again today (E-mini S&Ps +0.2%). This has allowed Asian markets higher (Nikkei +0.9%, Shanghai Composite +0.5%) and European futures are looking mixed around the open, with FTSE futures -0.3% and DAX futures +0.3%. In forex, there is a continued unwind of recent USD gains, aside from a touch of AUD weakness. EUR is ticking higher although this comes ahead of the ECB meeting later today. In commodities, the rebound on gold and silver from yesterday is just easing back slightly this morning, however, the rebound on oil is consolidating.
The ECB meeting dominates today’s economic calendar. European Central Bank monetary policy is announced at 1245BST with no change to the main refinancing rate of 0.0% or the deposit rate of -0.50%. However, the react action will come with the assessment of forward guidance. Will an “average” inflation element be introduced? Will the PEPP purchases level be increased, and by how much? The press conference of ECB President Lagarde is at 1330BST and should also be watched for the assessment of inflation and the strength of the euro. Aside from the ECB, at 1330BST Weekly Jobless Claims are expected to improve further to 846,000 (down from 881,000 last week). The EIA Weekly Crude Oil inventories are a day late due to Labor Day and are at 1600BST with an expectation of a drawdown of -1.1m barrels (-9.3m barrels last week).
Chart of the Day – USD/CAD
The big dollar rally and oil price sell-off has driven a big rebound on USD/CAD, but has this changed the outlook? Negative trends are being broken now, as not only a seven week downtrend but also the big near six week downtrend has now been breached by the move. However, the rebound has unwound USD/CAD into a band of resistance around 1.3240/1.3270 (the August pivot area) only for the move to fall over yesterday. That serves to increase the importance of this resistance area on a medium term basis. How the market reacts in the coming days will be key. There is so much resistance overhead from the old sell-off that this is now a significant overhead supply of sellers. If a higher low between 1.3130/1.3260 can now develop then the bulls will see this as a recovery building foundations. A move back below 1.3095 would suggest that the recovery is already faltering and a retest of 1.3040 and the 1.2990 key low is likely to be seen.
The unwinding correction on EUR/USD has been testing key supports in recent days, but for now these supports are holding. Throughout July and August, the key support area 1.1695/1.1750 build foundations for the move above 1.2000. Losing this support would be s key shift in outlook. For now it is holding, but with the confluence of the big four month uptrend (today at 1.1780) also being tested, this looks to be a key crossroads. A positive candle yesterday and early gains today seem to be coming with a stabilisation of broad market sentiment that is dragging on the dollar (helping EUR/USD higher). However, this all comes ahead of the ECB meeting today, which could drive a significant move on EUR. We expect a significant rise in volatility again and how the market reacts to 1.1695/1.1750 will be key. A closing breach (on EUR selling pressure due to the ECB being deems as “dovish”) would open 1.1500. However, holding the uptrend after today would be a significant positive for EUR/USD and the bulls can then begin to think about pressure on 1.2000 again. Initial resistance 1.1865/1.1880.
Cable is still being flung around by broad market sentiment (impacting on USD, where yesterday’s improvement drove renewed USD selling and therefore a Cable rebound) along with Brexit trade talks (impacting on GBP outlook). Both these factors are still live today and as such the outlook is uncertain. After Tuesday’s key breakdown below 1.3000 and intraday rally into the close yesterday has formed a bullish “hammer” candlestick. This is a recovery candle, but given the uncertainty of the newsflow, it is a difficult signal to implicitly trust right now. The technical outlook has been significantly harmed by the decisive break below 1.2980/1.3000 support. There is now a band of overhead supply between 1.2980/1.3055 whilst an eight day downtrend falls at 1.3130 today. Given the deterioration in momentum, we are cautious of thinking that a bull hammer just turns the market back into positive mode once more. At the least, a closing move above 1.3055 is needed now. The newsflow will continue to be a key driver of Cable (and you can add the associated reaction to the ECB decision into the mix too). Yesterday’s low at 1.2880 will grow in importance as support now.