Broad market sentiment is leaning negative on Monday morning as the latest step up in the trade dispute between the US and China is formalised. The US will today begin to place 10% tariffs on $200bn of imports from China, whilst China will place tariffs on $60bn of good imported from the US. With the yen and the dollar (seen as the main safer haven forex plays) outperforming better, whilst higher risk currencies seen linked to Chinese trade (Aussie and Kiwi) are under pressure. Equities are also lower as the appetite for risk is hampered in early moves today. Treasury yields may be relatively muted but Bund yields are lower and it is interesting to see gold is trading lower (the dollar outperformance is outweighing the safe haven demand for gold). However, another key currency to watch today will be sterling. Away from US tariff issues, the key factor for the pound is Brexit. A rather concerning culmination to the EU summit on Friday saw sterling sold sharply as the prospects for a Brexit agreement took a hit, with the EU dismissing the UKs proposals for withdrawal. This has heightened the potential for a “hard Brexit” which is something that would be sterling negative. Having had the weekend to think about it, how do traders also weigh up the potential for a second referendum , with the opposition Labour Party now seeming set to back a re-run of the vote (something that then increases the potential for the UK to actually stay in the EU again). The one thing is for sure, a choppy ride for sterling traders will become even more volatile.
Wall Street closed mixed to slightly positive on Friday the gains on the Dow but the S&P 500 was a shade weaker (-1 tick at 2929) and futures are lower in early moves today. With many of the key Asian markets closed today (Japan and China), European markets are also taking a bit of a hit in early moves today, something which could mean that the DAX underperforms. In forex, there is a safe haven bias, with the yen and the dollar performing well, with the higher risk majors such as the Aussie and Kiwi under pressure, although sterling is relatively settled coming into the European session. In commodities, with the dollar performance we see gold is slipping back again, whilst oil is higher as the prospect of tightening sanctions on Iran hits expectations of output.
It is a light economic calendar for today’s session with only the German Ifo Business Climate due at 0900BST of any real note. Consensus expects a slip back to 103.2 after a jump back to 103.8 in August.
Chart of the Day – EUR/AUD
The improvement in the outlook on the Aussie has had a negative impact on the near to medium term outlook on EUR/AUD. However, can the improved technicals on the Aussie survive the deterioration in the broader market risk sentiment this week. The daily candlesticks on EUR/AUD throughout the past few sessions have included a significant bearish engulfing candle that began the corrective move, followed by a break below 1.6135 to complete a small top pattern that implies 220 pips of downside towards $1.5915 which is very close to a pullback towards the old June/July highs at 1.5890. Momentum indicators have turned corrective with the MACD cross sell signal, whilst the Stochastics are corrective too. Thursday’s bull candle has acted as a pullback to the neckline of the top at 1.6135 where a subsequent negative candle on Friday resumed the selling pressure again. The hourly chart shows momentum in corrective configuration with the 144 hour moving average now a basis of resistance (having previously been a basis of support). The resistance is now in the range 1.6160/1.6210 which would be another chance to sell on another negative near term signal.
Thursday’s closing break above $1.1750 was a real signal of intent by the bulls, coming as it did on a strong bull candle. The move followed by an intraday move above the $1.1790 July high on Friday shows that the bulls are close to the decisive overhead test with the resistance of $1.1850. However before that is seen, there may be another opportunity to buy EUR/USD at a better level once more. A corrective close on Friday is pulling the euro back into support once more, but this looks to be an unwinding move that is a retreat into a band of support around the previous $1.1720 breakouts. The medium term configuration of momentum indicators remains positive and corrections look to be a chance to buy. The hourly chart shows momentum has unwound to levels where the buyers have resumed control recently, whilst a two week uptrend is also supportive above $1.1700 today. Key support is $1.1650 to continue the bull progress.
A massive bear candle on Friday came in the wake of a lack of progress in the Brexit negotiations at the EU summit in Salzburg. The decline has decisively broken the recovery uptrend and now threatens to turn the outlook corrective. The question is now one of how the bulls respond to the disappointment. Has the outlook now shifted? Reaction in the coming days could be crucial. The market has unwound to the previous breakout at $1.3045 and if this underlying demand fails to hold then the momentum in a corrective move could build. A second consecutive bear candle would suggest that traders have has had the weekend to contemplate their positioning and further selling pressure back towards $1.2800 could be the result. There are no decisive negative signals yet on daily momentum. The hourly chart shows a failure to reclaim initial resistance $1.3100/$1.3120 would help to build up downside pressure. A key moment for sterling.
The market has been trending higher over the past two weeks with a run of higher lows and pushing through resistance. This has decisively improved the outlook which has come with the move through 112.15 and there is now a basis of support in the band 111.65/112.15 which even if the uptrend is broken, will be seen as a source of underlying demand. Momentum is positively configured but with a marginal slip into the close on Friday the Stochastics are looking a touch wary. A negative session today could encourage a near term correction. The hourly chart shows an uptrend channel still broadly intact aside from a brief wobble early today. Watch momentum indicators for any leading signals for a correction though. Resistance at 112.85 protects 113.15.
The ranging outlook on gold continues to dominate the chart of the past four weeks. Having spent much of the past week edging higher, one corrective candle on Friday has again scuppered the potential for a bull break. This is beginning to drag on momentum indicators once more and with a negative open today there is a concern that the lows of the range at $1183/$1187 could come back into play. The RSI falling below 40 would be a signal that the sellers are gaining control, but for now a range remains intact. Resistance is growing between $1211/$1212. The hourly chart also shows that there is a basis of a pivot around $1200 meaning that the outlook is beginning to lean more negatively configured within the range now. A closing break below $1183 would be a decisive negative move.
The uptrend of the past five weeks continues to run higher and a sequence of higher lows that is pushing the market towards consistent pressure on resistance with a breakout still threatening. Three closes now within the old resistance band $70.45/$71.40 but coming with intraday moves to $71.80 suggest the bulls are close to another push higher. Momentum indicators show a move to buy into weakness with the uptrend at $68.90 today but Friday’s low at $70.00 will be seen as initial support. This is reflected on the hourly chart configuration which also shows key support in the band $68.50/$69.50. A jump higher again in the early moves today is threatening the breakout and a close above $71.40 would be a bullish move confirmed above $71.80 which would open $75.25 medium term resistance.
Dow Jones Industrial Average
The Dow has burst through to all-time highs with four successive strong bulls candles with successive upside gaps at the open. With now two days closing above the January high at 26,616 the bulls are in the driving seat and filling the gap in Friday’s session shows that they are still very strong coming into the new week. However with futures lower, it will be interesting to see how the bulls react as the RSI is up at 76. Momentum is clearly strong but stretched, however, this is a strong move and is still likely a reflection of the strength of the trend rather than an overbought market. In December/January the market spent almost seven weeks with the RSI above 70 as the bulls pushed ever forward into all-time highs. However, for now, there is also the aspect that the market is trading around the highs of a three month uptrend channel. Initial support is at 26,616, whilst any unwinding move will still be seen as a chance to buy.