On a week where most major markets are sitting in ahead of a crucial FOMC meeting, there is still Brexit to keep traders entertained. However, sterling bulls will not be laughing as the pound seems to be the butt of the jokes right now. After several weeks of leaning sterling negative on the prospect of a Brexiteer Prime Minister, the boat seems to be ready to keel over now. The rhetoric seems to be ramping up and a “no deal” Brexit is being increasingly priced in. The bottom for sterling against the dollar during normal market conditions (i.e. not during the October 2016 flash crash) was $1.1980 from January 2017. This seems to be in sight now of a market that is pricing for one of either a “no deal” Brexit or the uncertainty of a General Election. Either scenario is perceived to be a sterling negative outcome. The one big caveat is that the market is so incredibly short of sterling on options markets that any sign of an improvement in prospects could produce an enormous snap rally. Away from Brexit, the Bank of Japan monetary policy decision was overnight and the BoJ opted for a wait and see approach. No change was expected to rates at -0.10%, however, the potential was that they could adjust forward guidance. It will “not hesitate to take additional easing measures” but maintains current levels of rates “at least through around Spring 2020. The yen has gained ground on this as the BoJ did not take the dovish step of pushing out this forward guidance to beyond next spring.
Wall Street had a mixed session with the Dow a shade higher and the S&P 500 a shade lower by -0.2% at 3021. With US futures slightly higher early today (+0.2%) this has helped to support Asian markets (Nikkei +0.3%, Shanghai Composite +0.4%). In Europe, there is a mixed outlook once more, but interestingly, we continue to see the negative correlation with sterling adding to FTSE outperformance. FTSE futures are +0.3% with DAX futures around flat. In forex, the mild outperformance of USD continues although JPY is the main outperformer. GBP continues to slide ever lower. In commodities, there is a mixed outlook on gold, whilst oil is building on yesterday’s gains with a further half percent today.
The Eurozone Economic Sentiment indicator for July is at 1000BST which is expected to slide to 102.6 (103.3 in June) which would be the lowest level since March 2016. Into the US session the Fed’s preferred inflation gauge, the core Personal Consumption Expenditure is at 1330BST. With growth of +0.2% on the month the year on year inflation is expected to pick up to +1.7% having sat at +1.6% for the past couple of months. Then at 1400BST the S&P Case Shiller House Price Index is expected to slip back to +2.4% (+2.5%) which would be the lowest since August 2012. The Conference Board’s Consumer Confidence is at 1500BST and is expected to show a decent pick up to 125.0 (from 121.5 in June). Pending Home Sales are at 1500BST and are expected to grow by +0.5% in June.
Chart of the Day – FTSE 100
After weeks of trundling sideways, FTSE 100 has absolutely rocketed higher to breakout to 11 month highs. The strong negative correlation with sterling remains a key factor (and sterling continues to decline, thus supportive for FTSE 100). The closing break above resistance at 7622 completed a small consolidation range breakout that now implies a move to 7770. What we have seen with previous (and similar breakouts) during the past few months, is that the breakout resistance subsequently turns supportive now at 7600/7622. Momentum indicators are increasingly strong, with the bull cross on MACD lines above neutral and RSI strong into the high 60s. What will interest the bulls is that FTSE 100 continues to run higher within a 2019 uptrend channel which improves potential for a move towards a test of the all-time high at 7903. The hourly chart shows the market initially stretched on a near term basis, however, any intraday weakness unwinding move into support should be seen as a chance to buy now (especially if sterling continues to decline).
On a day where sterling was being ripped to shreds over fears of a “no deal” Brexit, the euro held up very well. EUR/USD actually formed a bull candle and the support at $1.1100/$1.1110 continues to hold. In the past three sessions, this band has been tested and held firm. Momentum remains negative, but the euro bulls are battling hard. This could well remain the case until the crucial FOMC decision tomorrow. Interestingly, the hourly chart is also now beginning to look at least neutrally configured on momentum. Initial resistance at $1.1150 is holding, and is a near term gauge for sentiment within the consolidation. The main area of overhead supply and resistance is still $1.1180/$1.1200 and is the key gauge for how sustainable a recovery is. A closing breach of $1.1100 opens $1.1000 and perhaps $1.0850 but is not expected in front of the Fed.
A “no deal” Brexit is like a millstone around the neck at the moment as Sterling is falling like a pebble down a well. Since breaching the previous support at $1.2380, Cable has fallen -160 pips in a solid bear candle yesterday and another -100 pips early today. There is a basis of support around $1.2100 from March 2017 next in line. However, there is very little to prevent $1.1980 which is the January 2017 low and realistically the post Brexit low. During a flash crash of October 2016 there were some wild prices being filled on different platforms, however, the low of Cable during normal trading conditions since Brexit has been $1.1980. During these moments, talking about momentum and oversold conditions is relatively meaningless as the market is like a hot knife through butter right now. The massive caveat, is that things can turn very quickly, usually on some news driven event, so care needs to be taken. Especially with the market so incredibly short of sterling right now. Resistance levels are also relatively meaningless until you get back around $1.2380 from the previous breakdown.
An early slip back this morning is threatening the support of a mini uptrend of the past eight sessions. Given the session high was a shade under the key near to medium term resistance at 109.00, this reflects the squeeze the technicals now see. With less than 50 pips between the trend and resistance, something has to give. There is still a positive bias to the two month range between 106.75/109.00 and even if the trend were to be breached, holding a higher low support around 108.35/40 is a better gauge. However, although the bulls will still have designs on testing and pushing through the key resistance at 109.00, momentum indicators are not screaming out for a breakout quite yet. The RSI is still limited under 60, which has been an historic barrier for the bulls in recent months. We continue to have a view that a move on the RSI into the mid-60s would be consistent with a decisive shift in sentiment on Dollar/Yen, namely a confirmed breakout above 109.00. It is interesting to see that, on a near term basis, yesterday’s intraday low came a shade above the recently broken lower high at 108.35, with the old resistance a basis of support. This is therefore a level to continue to keep an eye on as a gauge for a continued positive bias within this range.
The consolidation that has taken hold between $1411/$1433 has been stabilised again after the wobble following the ECB. Although the six week uptrend has been breached, this seems to have been more as a result of the consolidation than anything more sinister for the bulls. There is a marginal drift lower on momentum indicators in this environment remains a move to unwind and potentially renew upside potential. The RSI has drifted calming into the mid-60s and MACD lines unwinding from their position of strength. Whilst the market holds on to the important pivot support at $1400, the bulls will still be in relative control of the outlook. The hourly chart shows a market very much in consolidation mode with a clutch of broadly flat moving averages and benign momentum. Gold remains in wait and see mode for the Fed. A closing breakout of the $1411/$1433 range will help now.
Are there signs of life in WTI again? After posting two mild positive closes to end last week, a solidly positive candlestick formation yesterday sees the market picking up again. It is interesting to see there is an uptrend that can be derived from the lows of the past seven weeks. This trend is now a gauge for the pick up and potential recovery. Another tick higher early today helps to add to the bounce. Now the market needs to break through resistance. Last week’s reaction high at $57.65 needs to be decisively breached for the bulls to suggest a decisive near term improvement is underway. There is a very slight tick higher on momentum which is reflective of the recent move. However, the hourly chart shows the market has simply rebounded back to the limit of a two week consolidation. Therefore, this resistance at $57.65 is key near term. A closing breakout would imply around $60 target. Failure and a drift back towards the 7 week uptrend at $55.85.
Dow Jones Industrial Average
The consolidation of the past two weeks is beginning to drag on the positive outlook for the bulls. Although the market ticked slightly higher yesterday, the uptrend since mid-June is losing its integrity and the momentum indicators are beginning to sag somewhat. Although at this stage there is nothing overly concerning by the consolidation, the bulls could do with being shaken from their slumber. However, unless the support band 26,695/27,069 is breached then the outlook will remain fairly positive. The bulls just need a nudge in the right direction again. Resistance sits between 27,298/27,399 and a closing breakout would be a breath of fresh air. For now though (in front of the Fed at least) it is a waiting game.