In the build up to Fed chair Powell’s speech, the chatter was whether the Fed would meet the market’s dovish expectations. Reaction in the wake of the announcement was one of uncertainty, with significant swings across major forex. However, coming into today’s session there is a sense of risk positive and dollar negative forces playing out. The crux of Powell’s speech is that the Fed will be on hold with ultra-loose monetary policy for some time to come. In shifting to an average inflation targeting system, the FOMC will allow inflation to rise above 2% “for some time” to counter periods where inflation has been below the 2% mandated target. It will also allow unemployment to run lower for longer (the second part of its mandate) to drive a strong labor market. Bond markets have reacted, in “bear steepening”, where shorter dated yields (the interest rates end of the curve) remain relatively anchored) whilst longer dated yields (the growth and inflation end of the curve) are rising. This is risk positive ultimately, and if US rates are not going up any time soon, the dollar also suffers. This is looking to develop once more today. Equities futures are strong, whilst the dollar is weaker across major forex. To complicate things a little on Dollar/Yen, add in the resignation of Japanese Prime Minister Abe due to health reasons. The yen is gaining some strength off this.
Wall Street markets closed a little mixed last night (NASDAQ losing ground, Dow solidly higher) with the S&P 500 +0.2% at 3484. US futures are gaining ground though today, with the E-mini S&Ps +0.6%. In Asian, a mixed session, with the Nikkei -1.4% whilst Shanghai Composite was +1.6%. In Europe, there is a mildly risk positive bias, with FTSE futures and DAX futures around +-.3% higher. In forex, there is a weaker USD across the board, with AUD and NZD outperforming, along with GBP doing well. In commodities, the weaker dollar is also heling gold and silver regain some positive momentum, whilst oil is just trying to hold ground after two sessions of losses.
US inflation is the focus to the economic calendar today, but there is also a clutch of Eurozone sentiment data for August to keep an eye out for, all at 1000BST. Eurozone Economic Sentiment is expected to improve slightly to 85.0 (from 82.3 in July), whilst the final reading of Eurozone Consumer Confidence is expected to be unrevised at -14.7 (from -15.0 in July). Eurozone Industrial Sentiment is expected to improve to -14.3 (from -16.2 in July), whilst Eurozone Services Sentiment is also expected to improve to -24.4 (from -26.1 in July). Into the afternoon, the Fed’s preferred inflation metric, the US core Personal Consumption Expenditure is at 1330BST and is expected to improve by +0.5% on the month in July, improving the year on year reading to +1.2% (from +0.9% in June). Final Michigan Sentiment for August is at 1500BST and is expected to be unrevised at 72.8 (from 72.8 prelim August and up from 72.5 final July).
Chart of the Day – GBP/JPY
Sterling/Yen has broken out decisively above resistance at 139.75. This barrier was the old June high which has been repeatedly acting as a ceiling over the past couple of weeks, until Wednesday’s closing breakout. However yesterday’s decisive bull candle has now cleared the resistance with a near six month high and is the next step forward in recovery. There has been a strong uptrend of the past two months with a succession of higher lows, the latest at 138.25 last week, but the market is now using the 139.75 breakout as the basis of support. The uptrend comes in at 138.75 today, whilst the rising 21 day moving average (today around 139.10) has become a great basis of support now. Momentum indicators have turned bullish again, with upside potential too. We now look to use near term weakness as a chance to buy. With Prime Minister Abe’s resignation this morning, we could see a near term slip back but an initial buy zone is between 139.75/140.20 whilst anything towards the 21 day ma is also a buying opportunity. Below 137.75 would be a disappointment for the bulls now. Moving through 141.00 early today, the next real resistance is not until 144/145.
There were some pretty significant swings on the dollar in the wake of Fed chair Powell’s speech yesterday, however, as markets begin to settle down, the risk positive aspects are beginning to come through. Yesterday’s almost “long legged doji” candle reflected the uncertainty, but this morning we are seeing traction higher once more. Even with the volatility of yesterday’s session (140 pips from high to low in about an hour before moderating into the close), we still see the support around 1.1750 holding firm. Daily momentum is beginning to pick up and if the market can begin to close above 1.1880 it would be a sign of growing confidence that the bulls are regaining control again. The hourly chart also shows that a move above 1.1850 is now looking to build now. Effectively a mini range breakout of around 100 pips, this implies 1.1950 as a target which brings the multi-year highs of 1.1965 back into play again, especially if the breakout support at 1.1850 continues to hold. The importance of 1.1750 is growing, whilst 1.1695 remains key support.
The bulls are on the brink of a breakout again. Elevated volatility during yesterday’s session left a somewhat neutral looking candle with potential bull failure. However the bulls have dusted themselves down and come back in this morning to pull the market higher once more and to test the resistance around 1.3265. A close above this level today would be another strong signal. A close clear of 1.3285 (an old December resistance) would also open the spike high of 1.3515 (in the wake of the UK General Election result). It is interesting to see that 1.3185/1.3200 is now forming as a basis of support now. Daily momentum indicators are set up positively, with renewing upside. Stochastics and RSI are strengthening (although we just need to keep an eye on potential negative divergence). Moves of the past couple of weeks are strengthening support at 1.3050, whilst a near two month uptrend is around 1.3065 today. We look to buy Cable into weakness whilst the 1.3050 basis of support holds. Below 1.2980 changes our near term bullish outlook.
The elevated volatility in the dollar moves since Jerome Powell’s speech yesterday is still to really settle down. With an Average True Range of around 70 pips currently, yesterday’s 110 pip range has already been followed by a 90 pip daily range today. A swing higher yesterday is being countered by early downside today. However, what is interesting from a technical perspective is an early bull failure just under the 107.00 key resistance, but also a spike lower found support above 106.00. For a while we have discussed the importance of how the market deals with this area of resistance 106/107 of all the old April to July lows. A near term uptrend formation from the 104.17 low is intact whilst an eight week downtrend has been breached now. This lends a very slight positive bias as the market tests this 106/107 band. Now we are though Fed chair Powell’s speech the next real move above 107 or below 106 will likely be outlook defining for at least the near term. Daily momentum indicators are mixed and we await a conviction move. We have favoured selling strength for a while, but our conviction is being tested. One caveat to all this, is that the resignation of Prime Minister Abe is a near term volatility factor which seems to be yen strengthening this morning.
As with most of the major markets we cover, gold saw elevated volatility yesterday on Fed chair Powell’s speech. An initial upside break of a 3 week downtrend, then failed and the market retreated to find support at the bigger now 12 week uptrend. Technically, it is interesting to see that once more the 23.6% Fibonacci retracement (of $1451/$2072) at $1926 is again a basis of support into the close. With the market ticking higher today, there is a sense of support forming. This is added to buy a stabilising of momentum indicators, where the Stochastics are beginning to tick higher and RSI holding around 50. A closing breach of the 3 week downtrend (at $1949 today) would suggest the bulls regaining traction. The hourly chart shows that a decisive (holding) move above $1955 would be a key improvement near term, however, there is a sense that with hourly RSI oscillating consistently between 30/70 this is still a range of just over a week. The importance of support between $1900/$1915 seems to be growing, with several intraday lows in that band in the past seven sessions. Now through Fed chair Powell’s speech, and bull trends/support holding, we are looking for the next buy signal. A decisive move above $1955 opens $2015, with $1980 initial resistance.
Brent Crude Oil
Once more the bulls have been unable to drive the market for a decisive breakout. Shying away from the resistance at $46.25 (leaving a slightly lower high at $46.10) and posting two successive negative closes looks to be a disappointment, however, the outlook remains bullish. Buying into weakness has proved to be consistently the right strategy for oil over recent months as the (albeit shallow) uptrend has continued. The uptrend sits around $44.00 today whilst the support band $43.60/$44.25 means that this is a good area of support now. The rising 21 day moving average (today around $44.95) has also consistently been a good basis of support too. A slide back below $43.60 would be a disappointment near term, and reduce the conviction of the positive outlook, but only below $41.30 would be a decisive shift in outlook to the downside. We see this slide back into support as another opportunity to buy for pressure on $46.25 and higher in due course. The next real resistance beyond $48.40 (a minor old low) is $53.10/$53.90.
Dow Jones Industrial Average
A broadly risk positive assessment of Fed chair Powell’s speech has allowed the Dow to climb further. Another positive close at multi-month highs and the market is now trading inside the key February bear gap at 28,400/28,890. A “close” of this gap would put the Dow on an imminent path to test the all-time high of 29,568. US futures are looking positive again early today and the outlook remains one to buy into weakness. The support is building between 28,000 and now 28,400 to leave this as a near term buy zone now. All trends are strong as are momentum indicators, even if the RSI is a little stretched. Buying between 28,000/28,400 would be ideal, but the first key area of support is now 27,525/27,580.