Market Overview
The recovery of the US dollar has taken a pause in the wake of the FOMC decision, however could a potential pick up in wages trigger the next bull run? It is interesting to see that Treasury yields have dropped back after the Fed signalled a willingness to allow inflation to run a touch hot in its recent statement (via use of the word “symmetrical”). However, we quickly now turn to the Non-farm Payrolls report today in which the bulls will be looking for signs of building inflation. Headline payrolls fluctuate from month to month and the algorithm-based trading systems react quickly, but ultimately the market is looking for whether wage growth is continuing to build in the US.
Pretty much all other indicators suggest inflationary pressures are building (interestingly the Employment Cost Index for Q1 was higher than expected last week) and if this is backed by increasing wages then there is likely to be a reaction on Treasury yields and subsequently the dollar (via the renewed impact of interest rate differentials).
Markets are consolidating in front of the announcement this afternoon, with traders keeping their powder dry. However any unexpected pick up in wages could result in the next leg higher in the US dollar recovery.
Wall Street staged a remarkable intraday recovery to close mixed on the day (when previously a day of sharp losses had looked likely). The S&P 500 closed -0.2% at 2630, and futures are showing very mild losses initially today. This means that Asian markets slipped just a touch (Nikkei -0.2%, however European markets are opening with gains as they play catch up on the late US rebound. In forex, there is a very slight sense of risk off and mild dollar gain in early moves, but this is likely to simply be traders jostling for position and little can really be read into it ahead of the uncertainty of payrolls. In commodities, gold is marginally weaker on the dollar ticking higher, whilst oil is almost entirely flat.
Although the payrolls report will be foremost in traders’ minds, the final Eurozone services PMIs will still be watched in the morning. The Eurozone Services PMI is at 09:00 BST and is expected to be confirmed at 55.0 from the flash reading which would be down from the 56.2 back in March. The final Composite Eurozone PMI is expected to be 55.2. However the US Employment Situation at 13:30 BST then takes centre stage with the headline Non-farm Payrolls expected to improve back to 192,000 from last month’s very low 103,000.
Watch also for the upward revisions to prior months, with six of the past seven months having had an upward revision. However, with such a big focus on inflation, the market will be mostly concentrating on the reading of Average Hourly Earnings which is expected to be +0.2% for the month (+0.3% in March) which would hold the year on year reading at +2.7%. With recent data series (including yesterday’s ISM/PMI data) showing input prices rising, if wages also tick higher then this would be a market mover. Also look out for Unemployment which is expected to fall to 4.0% (from 4.1%) but also how the U6 Underemployment moves, having dropped back to 8.0% last month. Participation rate was at 62.9% last month.
Chart of the Day – EUR/AUD
In the past week or so, commodity currencies have gone from the G10 underperformers to being the comeback kids. With the euro still under corrective pressure this has dragged Euro/Aussie back to the support of a four month uptrend channel which is being breached this morning. However, perhaps just as important, the market is also back to the support of the rising 55 day moving average, which over the past year has been an excellent gauge for support and resistance (currently supportive). The move remains in a near term downtrend, whilst the increasingly corrective outlook on the momentum indicators is a concern (especially the falling bear kiss on the Stochastics and the bear cross on MACD lines. This is now a key crossroads for EUR/AUD. A close below the trend channel and 55 day moving average (currently 1.5900), whilst the RSI is now into multi-month lows. A close under 1.5900 would open a retreat to the pivot support at 1.5800 and open the prospect of a double top pattern for a deeper correction within the 14 month primary uptrend (currently rising at 1.5665).
A rare positive session for the euro has seen the market rebound, but this move looks likely to be seen as another chance to sell. The downtrend of the past two weeks comes in around $1.1990 today which is around where the market is consolidating this morning in front of Non-farm Payrolls. The negative configuration across the momentum indicators continues to suggest that rallies will be sold into. The only caveat may be the RSI hovering around 30 which in some regards is considered to be an oversold condition, however, given the continued strength of the dollar, is more likely to be a signal of how strong the trend remains. The rebound yesterday shows through on the hourly chart as an unwind to bring the hourly RSI back to 60 and hourly MACD lines back to neutral, both areas where the sellers have resumed control previously. Today’s payrolls report adds uncertainty but any rebound is likely to still struggle, whilst a test of $1.1915 is still preferred.
Whilst the euro at least staged a one day rally, Cable on the other hand is still really struggling. A drop of a handful of pips on the day and an almost doji candle suggests consolidation (which has at least continued into today) but given the proximity of Non-farm Payrolls, this could be understandable. The trend lower of the past two weeks remains solid, currently falling at $1.3660 which is a confluence with the overhead resistance band at $1.3655/$1.3710. Momentum indicators remain solidly negatively configured, with the MACD line falling ever below neutral, Stochastics deeply negative and the RSI well below 30. Theoretically a doji candle implies uncertainty with the prevailing trend, but the balance of indicators remains strongly negative and any recovery will still struggle for traction given the weight of overhead supply now in place. The hourly RSI shows a market just unwinding momentum and is set to find selling pressure resuming . The initial support at $1.3535 is likely to be tested again, with $1.3455 the next real support.
The sparks of a near term yen recovery have managed to form a solid negative candle as the market has dragged lower. However throughout this recovery of recent weeks it has been a feature that corrections have simply been unwinding moves to help renew the upside potential for the next push higher within the uptrend. Initial support at 108.95 held yesterday and the uptrend comes in at 108.55 today. There is a notable tick lower on the momentum indicators that will need to be watched now though, as clearly the dollar bulls are not having everything their own way for the time being. The Stochastics are beginning to drop back, whilst the RSI has backed away from 70. On a more medium term basis though, even if the trend higher were to be breached the bulls would still be looking upon the key breakout support around 107.90 as a basis of support. For ow this remains a move to unwind but the reaction to payrolls will be an interesting gauge for continued dollar strength today.
Gold
The gold bulls have fought back to once more defend the key long term support band $1300/$1310. The recovery yesterday has now led to a two week downtrend having been broken and it will be interesting to see if the bulls can start to put together a run of positive candles. The market remains in its $1300/$1366 range that has lasted throughout 2018, however, it is interesting to see the 21,55,89 day moving averages all congregating together to for a “death cross” which certainly does not bode especially well. The market reaction to a recovery could now be a telling factor in how long the $1300 support lasts for. Momentum indicators remain negatively configured and suggest that rallies are now a chance to sell within the range. Reaction to today’s payrolls report will certainly drive near term direction and a strong report would put the $1300 range low back under pressure. The hourly chart shows that a resistance band $1315/$1325 is building up near term and needs to be broken for the bulls to gain traction in a recovery.
WTI Oil
Once more, within the scope of this two week trading range, just as it looked as though negative pressure was building, an intraday turnaround seems to be scuppering the growing sense of a breakdown. Positioning within the range is becoming ever more difficult as this is a consolidation that no longer looks ready to break lower into a correction. After two positive candles in the last two sessions, the momentum indicators are beginning to tick higher again. In truth, this could remain the case until 12th May which is the deadline for a decision from the US over potential of renewed Iranian sanctions. Subsequently the oil price could consolidate until then in this range $66.90/$69.55. The fact this continues to hold up above the $66.65 old key breakout is certainly a positive too. Expect volatility on payrolls today, but the range just continues.
An incredible intraday rebound into the close has put a far more positive complexion on the daily chart of the Dow than it had during the early stages of yesterday’s session. A 400 tick rally has formed a one day bull hammer candle which improves the near term outlook. The rebound closed an opening gap lower from yesterday morning and puts the bulls in a much better position coming into today. However the recent breaches of support and a continued downtrend of the past couple of weeks continues to show this as a corrective market and that this was a bounce that the bulls need to work much harder to recover control. The concern is that momentum indicators are clearly negatively configured, but also with further downside potential suggesting that rallies remain a chance to sell. The recent two week downtrend is still a factor to consider, but the initial test now is a key lower high at 24,185.
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