UK political risk and uncertainty remains elevated as Prime Minister Johnson, unable to get his Brexit agreement through Parliament in a fashion that he would like, now wrangles for a general election. A decision of whether to grant the UK another extension to the Article 50 deadline for leaving the EU is still yet to be made. However, aside from some grumblings of French President Macron (who is reportedly pushing for a short extension), the likelihood remains that a 3 month delay to 31st January is on the cards. The question is whether opposition MPs will allow Johnson’s Conservatives a shot at a general election as a way to end the logjam in Parliament. The risk of this outcome is a drag on sterling and hit to broader market risk appetite. This sense of risk aversion was supplemented just weaker US durable goods data which increases the potential of a Fed rate cut, but also reiterates market fears that last week’s retail sales disappointment may not be an anomaly. Risk aversion has helped a near term breakout on gold which is holding today. However, this morning we see that there is very little direction to speak of across major markets. A speech by Mike Pence (US vice President) was not as hawkish on China as previous speeches have been, but added little for those hoping to assess the prospects of a US/China trade agreement. Perhaps the two surveys today (German Ifo and Michigan Sentiment) will provide some direction, but for now the likely driver would be the EU-27 decision on the Brexit extension seems most likely.
Wall Street closed mixed with gains on the S&P 500 at +0.2% higher to 3010, but the Dow was slightly weaker. US futures are a touch higher again today. However, this has done little to stoke the fires of bullishness in Asia with the Nikkei +0.2% and Shanghai Composite +0.2%. Furthermore, European markets are also looking cautious, with FTSE futures and DAX Futures all but flat. In forex, we are also struggling for direction with all major pairs a handful of pips either side of flat. At least there are signs of life on commodities through (not for gold which is +$1 higher) with silver over a percent higher, whilst oil is around half a percent lower.
A quiet end to the week for the economic calendar but a couple of important data points. The German Ifo Business Climate is at 0900BST and is expected to drop marginally again in October to 94.5 after last month’s tick higher (94.6 in September). This comes with the Ifo Current Conditions component slipping to 98.0 (from 98.5) whilst the Ifo Expectations are expected to improve a touch to 91.0 (from 90.8). Later into the US session, another important survey comes with the final Michigan Sentiment at 1500BST which is expected to be confirmed at 96.0 in October (96.0 at the prelim October, up from 93.2 final September).
Chart of the Day – EUR/JPY
As the rally on the euro has slipped in the past few sessions this has been a drag back on Euro/Yen. The market now sits at an important crossroads. Having made the key breakout above 120.00 which was an outlook changing move, this old pivot now becomes a basis of key support as the market has dropped back. Given the far more positively configured configuration on momentum indicators, we are inclined to see corrections now as a chance to buy. So as the RSI unwinds back from 70 and Stochastics roll over, this looks to be an opportunity for the bulls. Initial support is at Wednesday’s low of 120.35 but the key basis of support is at the 120.00 breakout. How the bulls react to this corrective slip will be a strong gauge as to how the bulls are positioned. There is a higher reaction low at 119.10 which needs to remain intact, with the rising 21 and 55 day moving averages a gauge for deeper corrections. Ultimately, the resistance at 121.30 is the key barrier that the bulls need to overcome for the next leg higher, but we see corrections as a chance to buy now.
The recent drift back on EUR/USD takes the market back to the key breakout support around $1.1100. There is a band of support $1.1075/$1.1100 which is a key are for the bulls to defend now. Coming through the ECB meeting with this support intact, and that of the three week uptrend will feel like a positive development now. However, after the market has left another lower high around $1.1160 (under $1.1180) to sell off into the close last night, the reaction during the European session could be crucial today. There is a negative drift filtering through on momentum in the past few days in reflection of the slide in the price, but for now this is just part of a near term unwind. RSI holding above 50 will be key now, as will MACD lines above neutral. A move below $1.1060 would be a disappointment for the bulls now and suggest this is a deeper correction. A key crossroads moment for EUR/USD.
A corrective drift on Cable in the past few days as Brexit uncertainty has resurfaced. A reaction of lower highs and lower lows is building to retrace the previous bull run of just over 800 pips. A 23.6% Fibonacci retracement (of $1.2195/$1.3010) sits at $1.2820 and is a basis of support along with the old breakout resistance at $1.2785. How the market reacts to these levels will be key. Politics is likely to drive the move (a long Article 50 extension will be a drag on GBP) but the levels are still key. Decisively under $1.2785 opens the 38.2% Fib at $1.2700 and 50% Fib around $1.2600. Momentum is beginning to wane on the daily chart (understandably) but nothing overly decisive yet. It is the hourly chart where a top pattern formation has come and a consistent breach of $1.2840 implies around 170 pips of downside (suggesting the 50% Fib is on). The key medium term breakout at $1.2580 also suggests this is a realistic retracement if momentum gets behind this move.
Once more during the consolidation of the past week, signals seem to be false moves for a market that is stuck in a rut. The breakout above 108.50 faltered under the key medium term pivot resistance at 109.00 last week, but this has ushered in a phase of indecisive trading, completely lacking conviction. This comes as momentum indicators have lost their way and becalmed. Resistance seems to be heavy above 108.70 but the sellers just cannot get a stable grip on the market. The hourly chart reflects a ranging market now between 108.25/108.95. With hourly RSI oscillating between 30/70 there is little real sustainable direction. We are looking for a break above 109.00 or below 108.00 for the next move. However, the market is now into its tenth session in this 100 pip band.
Finally, a break of the tedious tight range on gold, but is this a move to trust? A breakout above the near term resistance at $1497 has generated a bit of traction finally. A third positive candlestick (and one of increased magnitude) added $11 and even though the daily range was just $12 (under the $15 of a still declining Average True Range), at least this is something that the bulls can work from. Confirming a move clear of $1497 is key today, but the initial resistance at $1503 also being breached (albeit marginally) is a good start. A breach clear of the seven week downtrend at $1505 would also improve the outlook. The hourly chart shows that the move above $1497 completed a small base pattern and implies a test of the October highs at $1518 now. We will know more today about whether a tick higher on momentum can be trusted for traction. A fourth positive candle would be a signal to watch today. Initial support now at $1497, with $1488 now growing into a potential higher low of note.
The bulls responded well into the US session yesterday to drive the market higher for a third consecutive positive close. There seems to now be real upside traction coming on WTI. The Stochastics have accelerated into strong configuration, whilst RSI is confirming with a move to five week highs. However, it is not the MACD lines which are finding positive traction off a bull cross which is the real confirmation. The market pulled decisively above the 38.2% Fibonacci retracement (of $63.40/$51.00) at $55.75 yesterday and this now opens the 50% Fib level at $57.20. There is now a support band $55.40/$54.90 to use to buying into weakness. The next price resistance is an old pivot area $57.50/$57.75.
Dow Jones Industrial Average
Another session where the bulls failed to get a real hold on the market has left the Dow in a state of uncertainty again. Yesterday was a fifth consecutive candlestick where the bulls effectively lost the session, as the market closed with a negative candlestick. However, they will continue to point to the support that is holding above the 26,655/26,695 pivot. However, the fact that yesterday’s strong open was almost instantly sold into gives a disappointing feel to the market now. This continues a period of sideways trading which lacks any conviction on the Dow. A close above this week’s high of 29,645 would allow more of a positive outlook to develop, but the bulls have not got the control yet. Closing below 26,655 would be a disappointment now, especially after the recent consolidation.