The uncertainty in UK politics surrounding Brexit is enormous. Often with events, uncertainty comes into a binary pattern of potential events. However, with Brexit, there is such an array of potential scenarios that could play out that it is almost impossible to predict. What happens in situations of such significant uncertainty? Sell now and figure it all out later. UK Gilt yields falling sharply are not helping the pound either. This seems to be the path for sterling right now. The end result determines the means, right? Well, in this instance, it may not be the case, as Theresa May has succumbed to domestic pressure surrounding the seemingly unacceptable elements of the Withdrawal Agreement deal with the EU-27 (i.e. she cannot be the deal voted through on the current numbers). So she will go back to the EU and try to extract more concessions from the EU. It would be quite something if this proves to be successful in any substantive way, but this is likely to be a futile attempt. Cue analogies of cans being kicked down the road. Whilst this happens, today’s “meaningful vote” has been postponed and the UK remains in limbo/purgatory over the true outcome on Brexit. The volatility on sterling shows no sign of letting up.
Wall Street continues to experience elevated volatility, with wild intraday swings pulling a marginal gain on the S&P 500 of +0.2% at 2638 although futures are giving back these gains early today. The Asian markets have been mixed too, with the Nikkei -0.3% but Shanghai Composite +0.2%. European markets are reflecting the Wall Street bounce into the close with FTSE 100 futures +0.6% and DAX futures around +1% higher. In forex, there is actually a degree of calm initially as the European session takes over, with the slightest degree of dollar slippage after yesterday’s gains. In commodities, the rebound on gold is still holding ground, whilst oil has stabilised after another choppy day yesterday.
The UK remains in focus this morning, but more with regards to the UK labour market in October. UK Unemployment is at 0930GMT and is expected to remain at 4.1% (4.1% in September). UK Average Weekly Earnings are expected to remain unchanged at +3.0% (+3.0% in September). The German ZEW Economic Sentiment is at 1000GMT and is expected to drop back to -25.0 (from -24.3 in November). Into the afternoon the first of this week’s US inflation measures is released, with the US PPI at 1330GMT which is expected to show headline PPI dropped to +2.5% (from +2.9% in October) whilst the core PPI is expected to remain at +2.6% (+2.6% in October).
Chart of the Day –EUR/CHF
During these times of elevated fears, the Swiss franc is growing in strength. Subsequently EUR/CHF has broken down once more with the support at 1.1260 being breached yesterday. The technical deterioration on Euro/Swiss comes as the latest rebound has floundered at the overhead supply of the breakdown at 1.1350. It is also backed by momentum indicators, giving the RSI now failing under 50, the Stochastics crossing back lower with downside potential and the MACD lines now set to bear kiss lower. Yesterday’s latest bear candle shows that intraday rallies are a chance to sell with the market on course for a retest of the September low at 1.1180. The hourly chart shows a band of resistance 1.1270/1.1310.
It is a spluttering start to the renewed bull recovery, if that is what it turns out to be. Yesterday morning the market looked set for a decisive pull higher above $1.1400, but a fall back into the close has questioned the potential for recovery traction once more. In the wake of yesterday’s strong negative candle, today’s session becomes important. If the bulls can quickly put that disappointment to one side and post another positive candle then the fact that the market has recently broken a downtrend will become more prevalent again. However, a second consecutive negative candle will really question the recovery again. The support at $1.1300 is again an important level as it protects $1.1265. Momentum is still hovering around neutral and not signalling either way. Resistance is growing between $1.1430/$1.1470.
After a couple of weeks where Cable has been effectively consolidating, Brexit politics has once more seen a decisive break lower. Posting a loss of over 160 pips on the announcement of the delay to the vote in Parliament on the Withdrawal Agreement took Cable below $1.2660 to its lowest since April 2017. In also breaking initial support at $1.2585, the next support is now not really until $1.2350. Momentum remains negatively configured and there is little reason not to see further weakness amidst the uncertainty. The old support at $1.2660 is now a basis of overhead supply for any unwinding moves today. The market has bounced marginally from yesterday’s low at $1.2505 but do not expect it to be the low.
How will the dollar bulls now react to the positive candlestick from yesterday’s session? A big bullish engulfing candle has the power to change the outlook, but after a period of disappointment for the dollar bulls, is it to be trusted? During yesterday’s session, the early decline back to the six month uptrend held firm before closing a positive session higher. Previously in the past couple of weeks when this has been seen the rebound has struggled and simply turned lower again. Losing above the near term pivot at 113.20 was a positive, but now must be held as support today. The early move lower today looks uncertain. Momentum indicators remain corrective and near term negative, so how the bulls respond will be key to the near term outlook. Another close above 113.20 would help to improve the outlook and potentially help to pull the medium term momentum indicators positive again from medium term crossroads positions (especially the RSI above 40 and MACD lines around neutral). Support around 112.25 is growing.
Corrections are a chance to buy on gold. The breakout above $1236 on a consistent closing basis and trading clear of the pivot has opened the upside within the uptrend channel. Momentum indications are positively configured and yesterday’s corrective move is likely to therefore be seen as an opportunity. The breakout at $1236 would still be a basis of underlying demand on a further slip back today, whilst there is support of a now two week mini-uptrend at $1235 today. The support band $1230/$1236 is now key as the bulls would not want to break back below the 144 day moving average (currently at $1229). Resistance is initially at yesterday’s high of $1250.
It was interesting to see that the first full trading day after last week’s decision by OPEC+ was a negative session. Closing decisively lower on the day, the market is also hanging on to the old eight week downtrend. The recovery prospects have not been helped by this as momentum indicators which had been progressing well have not in the past couple of sessions started to tail off again. Yesterday’s session again shows how resistance is building in the band $52.75/$54.75. The market is instead threatening to drift back towards a test of the lows, with the psychological low at $50.00 and the $49.40 key November low. A close above the downtrend at $52.00 would help to improve prospects, but the resistance at $54.75 needs to be broken to start to generate a serious recovery.
Dow Jones Industrial Average
On a purely technical basis, looking at the chart of the Dow, yesterday’s rebound is almost the perfect hammer candlestick. Briefly touching a new low with a strong intraday recovery to close near the highs of the session. However, is this a pattern that can be trusted? Only time will tell, but the elevated volatility in recent sessions would usher caution with going long on this signal. This is a market that is experiencing wild daily moves. The Average True Range is once more pushing towards 500 ticks (currently 497) having been below 400 just over a couple of weeks ago. There is almost no real conviction holding from one day to the next. Momentum is negatively configured but with such high volatility, nothing should be ruled out right now. There is seemingly another key low in place with yesterday’s 23,881. Resistance to watch is only really significant at 25,095 from Friday’s high.