In light of the significant recent shift in outlook on FOMC monetary policy, and the decisive moves seen on major markets, the comments of Fed chair Jerome Powell come with extra weight. So with Powell warning against policy shifting on “short-term political interests” this is seen as a push back against Trump and his calls for rate cuts. Powell also stressed the Fed being in wait and see mode. In conjunction with last week’s FOMC dissenter James Bullard reining in calls for a 50 basis point cut in July, there has been a reaction on markets. What goes up, must come down. So we see the sharp bull run on gold (which had rallied 9% in two weeks) finally beginning to see profit-taking. Already over $30 back in the past 24 hours, an unwind on the bull run is gathering steam. We are also seeing an unwind on Wall Street with equity markets pulling back. The prospect of a less dovish than expected Fed is being priced in today. However, it is interesting to see little real reaction on Treasury yields yet. If this remains the case, then the rebound on the dollar, the pullback on gold and slip back on equities may still be short-lived.
On Wall Street, the prospect that perhaps the Fed may not imminently cut rates has spooked equity bulls, at least temporarily. The S&P 500 reacted by closing -0.9% lower at 2917. US futures are looking a bit more steady this morning, around the flat line, however, yesterday was enough to drag on Asian markets overnight, with the Nikkei -0.6% and Shanghai Composite -0.2%. In Europe, there is also a cautious look to the open, with FTSE futures -0.2% and DAX futures -0.3%. In forex, there is a rebound on USD in the wake of comments from Fed chair Powell and James Bullard. However, there is also a bounce on NZD after the RBNZ opted against a rate cut, holding at 1.5%. However, the dovish minutes (the committee discussing easing and agreed a move was likely to be needed) may mean that a rebound is short-lived. In commodities, gold has fallen back sharply in the past 24 hours, and the prospect of continued profit-taking is now growing. Oil has been supported following a larger than expected API inventory drawdown.
It is another quiet morning on the economic calendar, which only really gets going with the US Durable Goods Orders at 1330BST. On a core basis, an ex-transport monthly growth of +0.1% is expected in May (0.0% in April). The EIA Oil Inventories are at 1530BST and are expected to show a crude oil drawdown of -2.9m barrels (-3.1m barrels last week), with distillates building by +0.5m barrels (-0.6m last week) and gasoline sticks building by +0.2m barrels (-1.7m last week).
Chart of the Day – AUD/JPY
Despite the risk positive aspect of the FOMC meeting last week, there has only been a marginal uptick for Aussie/Yen. A minor recovery at the turn of the week, has continued higher today. However, this is a move into resistance and is likely to be the source of the next opportunity. The run of lower highs and lower lows of the past two months also means that the bears will be on the lookout. The latest breakdown below 74.95 is now an area of overhead supply. Momentum indicators have an ongoing negative configuration although they are currently in unwind mode. The RSI has ticked above 40 for the first time since late April, but unless it can sustain its move above 50, then it is difficult to back. Similarly with the uptick on MACD and Stochastics. Given the improvement in momentum, this is a crossroads for the pair, however, given the previous run of failed rallies, selling into strength remains the favoured position. As such there is a sell zone 74.95/75.30 and we favour a retest of the recent low at 73.95, with the continued downside towards the key lows around 73.10 in due course. A move above 75.30 would now hint at a turnaround, but the bears are in control until a move above 76.00.
The decisive breakout above $1.1347 was a key move, however the bulls will be looking for a response after yesterday’s negative session. We have been discussing the breakout support of the neckline around $1.1325/$1.1350 and now this band of support is being tested. Although momentum has temporarily ticked lower, there is a more positive configuration now which has been created following the recent rally. If the bulls can maintain control of the market in this slip back, then the chance is there for a buying opportunity. The hourly chart shows the slip back looks to be an unwinding move, rather than the beginning of a sharp correction. Support at $1.1270 would be a key break but for now, this looks to be a move well contained by the euro bulls. Initial resistance now at$1.1400/$1.1410.
There is clearly a growing importance in the resistance around $1.2760. This is a level that has contained three rallies in the past month, but held intact. Yesterday’s failed intraday breakout turned back from $1.2785 only to form a bearish engulfing candlestick (bear key one day reversal) which has again flipped the outlook negative this morning. This comes with the Stochastics crossing lower at 80 (seen as a sell signal) and RSI back under 50. An early slip today is now eyeing the support around $1.2650 which is a gauge for near term control (having played a role as a pivot previously). A close back under $1.2650 would suggest growing momentum of a corrective move again. The pressure is on, with the hourly chart showing a deterioration now in momentum. With initial resistance around $1.2700 the bulls need to hang on to support at $1.2650. They will still have thoughts of a breakout above $1.2760 (which would complete a base pattern), but for now they need to defend $1.2650. Losing it will open the recent low at $1.2505 again.
A decent response from the dollar bulls has the pair bouncing this morning. A rally from yesterday’s low at 106.75 is once more testing the resistance around 107.50 as a near term recovery threatens. However, this would all still be playing out within the confines of the medium term downtrend channel which has been pulling the market lower for the past couple of months. The channel resistance is at 108.35 today, whilst the 21 day moving average (an excellent gauge of resistance for rallies in the channel) comes in around 108.20 today. Momentum indicators remain decisively negatively configured, and even though there has been a tick higher, there is a huge amount more needed to suggest a decisive rally is forming. This move should be seen as a rally to give another chance to sell. There is plenty of overhead supply between 107.80/108.15 housing a band of sellers.
Is this the trigger for the end of the bull run? With such a strong run higher in the past couple of weeks (which added almost $120), profit taking is always a risk. Hitting a high at $1439 yesterday an intraday reversal pulled the market back $16 into the close. Even though this is not a bear candle, the move has continued lower today. Looking on the daily chart though, breaking a run of higher daily lows is a warning for the bulls. Momentum indicators are ticking lower, especially RSI and Stochastics, but no sell signals, at least for now. However, given the fast moving nature of this gold run, the shorter term, hourly chart is likely to give more timely signals. Having now unwound $30 from the high, the hourly chart is showing the warning signs. The hourly RSI below 35, hourly MACD lines below neutral, a breach of $1410 pivot are all important. An intraday failure under the building near term pivot at $1421 would increase the corrective momentum. A breach of $1400 (another minor pivot but also psychological) would be a signal to open $1382.
The rally on oil has broken out again following a slight pause for breath earlier in the week. The market is now on the brink of completing the implied target of $59.10 from the small base pattern earlier in June. The 50% Fibonacci retracement at $59.60 could though be a source of consolidation (especially since 38.2% Fib was breached with little fuss). The momentum of the recovery continues to improve, with the RSI into the 60s now, a two month high. Intraday weakness is a chance to buy. The hourly chart shows a band of support now $56.75/$58.20 and positive momentum configuration. The next band of price resistance on the daily chart is between $59.60/$60.00, a combination of late May highs and early May lows. This increases the potential for at least consolidation in the area.
Dow Jones Industrial Average
The bulls have just lost their way slightly in the past few sessions. A couple of consolidation candles have been followed by a decisive negative session. Whilst this flips the near term outlook, for now there is no need to panic yet for the bulls. Given the strong configuration still in place, this minor corrective move can be absorbed fairly comfortably, if the bulls can respond quickly. The recent breakout above 26,249 means that there is a key area of around 300 ticks of support now between 25,958/26,249. Building support at or above here will generate confidence once more and also help to renew upside potential. RSI has ticked lower but is still above 60, whilst similarly, Stochastics have also rolled over but remain positively configured. Resistance has been left at 26,907, but it is all about how the bulls respond now. The hourly chart shows this slip back to be contained within the positive configuration, at least for now. Initial support at 26,410.