The Fed may have changed the near term outlook for the dollar again. Expectation on the Fed to move on rates was non-existent yesterday. Markets had been pricing for over 60% probability of a rate cut this year. However, reaction would suggest the market has gone too far (now down to around 50% on CME Group FedWatch). Considering the only minor changes to the FOMC statement, the reaction has been relatively considerable. The reason, is down to one word from Fed chair Jerome Powell, “transitory”. The FOMC statement was only really changed to acknowledge a decline in inflation. However, “some or all” of this decline is seen as being transitory. Inflation has been the one key factor that has been missing in the economic recovery. It is not expected to sky rocket, but the recent fall on core PCE to +1.6% is only expected to be temporary. If so, then the Fed will be on hold for the foreseeable future. Hence a perception that traders have gone too far in pricing for a cut. Markets reacted by pulling yields back higher and the dollar supported. A move away from looser monetary policy is negative for zero yielding assets such as gold, but also less dovish means equities lower. Will traders continue this move today? There is a balancing factor this morning, with signs of traction towards agreement in the US/China trade negotiations, something which would be risk positive (and arguably dollar negative). So there is a balance to be struck, but for now the dollar is again supported.
Wall Street closed lower in the wake of the Fed, with the S&P 500 -0.7% at 2924. US futures are looking more steady this morning, but a mixed outlook is across Asian markets (although the Nikkei and China remain closed for public holidays). In Europe there is a move to play catch up on the post-FOMC decline on Wall Street, with FTSE futures -0.3% and DAX futures -0.2%. In forex, there is a mixed outlook, but JPY is a main underperformer and with risk more positive, AUD and NZD have found a degree of support. In commodities, positive risk and dollar support means gold is trading weaker, whilst there is a struggle on oil which continues.
Eurozone PMIs and a Bank of England rates decision will be in focus for the economic calendar today. Yesterday’s May Day public holiday means the manufacturing PMIs across the Eurozone are released a day after the UK and US. Eurozone final Manufacturing PMI for April is at 0900BST and is expected to remain at 47.8 (47.8 flash April, 47.5 final March). The UK’s Construction PMI is at 0930BST and is expected to improve slightly to 50.3 (from 49.7 in March). The Bank of England monetary policy is then key at 1200BST. No change is expected to interest rates at +0.75% (+0.75% in March) which would be the sixth straight month with no change. No changes to asset purchases are expected either with the stock of gilt purchases remaining at £435bn. In a parallel dimension where Brexit was delivered smoothly, this could have been a meeting where a rate hike might have been delivered. However, both decisions are expected to be unanimous on hold, as per the meeting minutes. It is also the BoE’s Super Thursday this meeting, with the Quarterly Inflation Report giving updates to forecasts for growth (likely lower) and inflation (also likely lower). US Weekly Jobless Claims at 1330BST are expected to improve to 215,000 (from last week’s spike to 230,000). US Factory Orders are at 1500BST and are expected to improve by +1.5% in March (following a -0.5% decline in February).
Chart of the Day – Silver
We have been looking at the track of silver in recent weeks, and the implications it has for gold. The technical outlook has become increasingly corrective in recent months. Silver looked to be building a basis of support recently, but once more the bears returned to pull the price sharply lower yesterday. The breach of the pivot at $14.90 last week was only brief and not decisive. However a rebound failed at $15.08 under an old pivot of $15.14 to leave another lower high. A slight redrawing of the ten week downtrend reflects this increasing corrective move. The RSI has been stuck below 50 and MACD lines stuck below neutral. This suggests a consistent line of selling into strength. Following yesterday’s sharp downside move which led to a four month low, the bears are increasingly in control. A basis of resistance now between $14.90/$15.08 means that this becomes a basis of overhead supply for rallies. Use strength to sell for further dips lower to test $14.46 whilst the $13.85/$14.00 support band could also come into view.
The recovery on the euro has been hit in the wake of the FOMC meeting. Three decisive positive candles have now been followed by a “shooting star” candlestick. All was fine for the rally until one word from Jerome Powell, “transitory”. A sharp intraday turn lower left a high at $1.1265 (coinciding with previous resistance) and the market has dropped back into the $1.1175/$1.1210 support band. The shooting star candle is a corrective signal and if now followed by a close back under $1.1175 this would suggest the selling pressure has resumed. There is an uncertain look to trading this morning, whilst momentum indicators are also looking unsure as they tail off in their recovery. Clearly the prospect of $1.1265 being another lower high is elevated now and this raises the likelihood for selling pressure to resume in due course. Below $1.1175 re-opens the $1.1110 key low.
A Brexit related Cable recovery has been stunted in the wake of the Fed, but not yet put to bed. It is interesting to see where the euro formed a bearish shooting start, Cable held up relatively well. Although the market closed in the lower half of the daily range yesterday (denoting a loss of impetus from the bulls) there is a sense of support still this morning. The momentum indicators continue to climb on the daily chart on which there are as yet no corrective signals. The hourly chart needs to be watched though. The support band $1.3000/$1.3030 is being threatened, whilst there are mild negative divergences on hourly RSI and MACD that suggest a loss of momentum in the recovery. Yesterday’s high at $1.3100 is now the key resistance to watch. This also comes under the first main lower high at $1.3130. A close back under $1.3000 would suggest the bulls are set to give back some of the gains.
Has the dollar turned a corner in the wake of the Fed? The drift lower over the past couple of weeks has been a move to unwind stretched momentum. With little real selling pressure, it has played out as a near term corrective move back to the support of a four month uptrend. The bounce off yesterday’s low around 111.00 is now looking to build higher today. Already this morning, the run of five consecutive lower daily highs has been broken. This comes with the RSI and MACD lines moderating and the Stochastics also threatening to turn up. The hourly chart shows a move back to the initial resistance band 111.60/111.90. A positive close today will improve the prospect of renewed upside for pressure back on the 112.20 pivot.
There is still an element of uncertainty over the near term outlook on gold, however, the decline on silver yesterday will be giving the gold bulls a bit of a chill. The post-FOMC reaction has been negative for gold. Although the pivot at $1276 held into the close yesterday, further weakness today is increasing the bear pressure and the April multi-month low at $1266 is back into range. Daily candlesticks have been fairly mixed and lacking direction recently, but a second bear candle in a row today would suggest the recovery is over. Momentum indicators are already looking to lead the price lower. The RSI is back under 40 this morning, whilst MACD and Stochastics recoveries are failing. At this crossroads, the buyers seem to be turning back again. A close below $1266 brings the eight month uptrend (currently $1265) into the firing line. The resistance at $1289 grows ever stronger.
A huge build on the EIIA inventories adds to the negative pressure on WTI. It will do little to dispel the prospect of a building top pattern. There is support at $63.00 which is an old breakout and a close below would be an increasing concern for the bulls. It would confirm a breach of the four month uptrend, but a move below $62.30 (last week’s intraday low) would confirm a completed top. An implied downside target of $4.30 towards $58.00 would be on for the coming weeks. Momentum indicators are not leading a correction though, with the RSI holding above 50 and MACD lines only in drift mode. A break below another support at $61.80 would add further confirmation for the increasingly corrective outlook. Resistance at $64.75 has grown as a lower high.
Dow Jones Industrial Average
The bulls have hit another bump in the road on the Dow. Only scraping gains in recent sessions, the resistance at 26,695 has prevented the market from progressing. A sharp turn lower into the close yesterday has completed a solid negative candle and threatens the neat term positive outlook. How the market responds today could now be key. There is a sense that the rally is struggling and another negative session today could see the profit taking of yesterday’s session accelerate. Already the RSI has dropped to a five week low and if Stochastics and MACD lines begin to similarly track lower there could be a real test of bull resolve. Initial support of last week’s low at 26,310 needs watching now (the RSI suggests it will be pressured). The key low remains 26,062 which is the April low and first higher low.