Market Overview
The recovery in the euro is gathering pace as markets are responding to the surprisingly hawkish comments from the ECB’s chief economist Peter Praet. In a speech yesterday, Praet suggested that the ECB could begin to formally discuss the winding down of the massive asset purchase program that has bought around €2.5bn and currently runs at €30bn per month. This would be a decisive step forward in the normalisation of monetary policy that the market has been anticipating for a while but until now has been able to position for (due to a strong of data disappointments).
Now, with inflation surprising to the upside and the hawkish comments from one of the ECB’s most dovish Governing Council members, this could be a trigger for renewed euro strength. These hawkish comments have meant that bond yields across major markets have increased sharply and yield differentials are playing a role in performance of currencies. Interestingly, this means that the dollar has also suffered across the major pairs, a move which continues today. Whilst the euro accounts for over half of the Dollar Index, the dollar is down again and trading around two week lows. Risk appetite also remains strong, with a decisive push higher on US equities with the VIX volatility falling consistently to levels not seen since January.
Wall Street closed a strong session with big gains with the S&P 500 +0.8% at 2772, whilst futures are also stronger today. Asian markets also showed strength overnight, with the Nikkei +0.8% and this is pulling through into early gains on European markets today.
In forex markets, the continued dollar weakness across the majors is once more present today, although there is a slight underperformance on the Aussie as exports fell by 2%.
In commodities, a weaker dollar is a factor in holding the gold price up amidst the ongoing positive risk appetite. Oil is also finding support despite the EIA inventory build, on supply issues in Venezuela.
The economic calendar is rather light on market moving announcements today, with little to impact markets until the US weekly jobless claims at 13:30 BST which is expected to once more remain around levels of recent weeks at 223,00 (221,000 last week).
Regards will also be given by UK traders to the comments of the Bank of England’s MPC member David Ramsden (leans slightly dovish) at 16:00 BST, whilst the Governor of the Bank of Canada, Stephen Poloz speaks at 16:15 BST and will have an impact on the Canadian dollar.
Chart of the Day – GBP/JPY
The recovery in risk appetite combined with positive surprises from UK data have driven a Sterling/Yen recovery, to a point at which the market is testing a confluence of key resistance. The combination of a seven week downtrend and the underside of the old 15 month uptrend channel are being challenged and the rally looks to have strong momentum behind it. The move has already pushed above resistance at 147.00 which was an old key floor of the past three months. Although this is a source of overhead supply it does not seem to be hindering the bulls. Momentum indicators are ticking strongly higher in recovery, with the Stochastics rising decisively whilst the MACD lines have also crossed higher. With the RSI around 50, this suggests that the market is now at a near term crossroads. Each of the past six sessions have posted higher lows, with the breakout above 147.00 now a basis of support initially and with the strength of the bull candles, corrections are a chance to buy. A close above yesterday’s high at 148.00 would now break the trendlines and re-open the May reaction high at 150.00 as the next basis of resistance. Key support is now 145.80.
The surprisingly hawkish comments from the ECB’s Peter Praet yesterday drove a strong breakout through resistance at $1.1750 to continue the recovery. This move has taken the pair above the 21 day moving average (currently $1.1750) for the first time since the selling pressure really ramped up in mid-April. This breaks the shackles of a recovery which is now set to test the next resistance at $1.1820/30 today but also brings $1.2000 back into view. The strength of the recovery in the momentum indicators confirms that the near term outlook continues to strengthen. The RSI and Stochastics are rising strongly whilst the MACD lines are also making decisive ground following a bull cross. The hourly chart shows that the break above $1.1750 completed a small base pattern which gives around 230 pips of recovery target and would mean that the psychological $1.2000 area is not unrealistic. There is now support $1.1710/$1.1750 to use as a near term buy zone, whilst the higher lows around $1.1640 are increasingly important now.
The Cable recovery may not be as developed as that of EUR/USD but it is nonetheless in motion. The key test today comes with the old key floor at $1.3450 which was previously supportive but is now resistance. An initial look at this level was rebuffed yesterday, but the bulls are coming back again early today and a closing breakout would be a real sign of intent now. It would open further recovery towards a test of the early May highs around $1.3615. As with the euro, there is a decisive improvement in momentum underway now with the Stochastics accelerating higher, MACD lines rising again, whilst the RSI is also making ground. The hourly chart shows the move higher is running within an uptrend channel with higher lows and higher highs. Corrections are a chance to buy. A near term breakout above $1.3400/20 also gives a ground of initial support and moves to unwind are now seen as an opportunity for the bulls. The support around $1.3345 is increasingly building as a key area near term..
The dollar has been suffering across major pairs recently, but at least it has been outperforming the yen. However that is being questioned early today as the market has dropped back below 110.00 support. There has been more of a drift higher than a surge, and the momentum indicators are reflective of this on the hourly chart. Closing above the pivot at 110.00 should have been a positive signal for the bulls and now this early slip today means that this is a key test of intent. In the past six sessions there has been a run of higher daily lows, meaning that yesterday’s low at 109.77 is a key level to watch today. A break back below this level would now be a disappointment in the recent recovery. The hourly chart shows the key support to watch is around 109.40 which has been a floor in the past few sessions. In this time the hourly momentum indicators have all been positively configured, but this is being tested today. If the hourly RSI moves decisively below 40 and MACD lines decisively below neutral it would be a signal of waning strength for the recovery. Also if the market falls below the rising 89 hour moving average (currently 109.80) it would also be a concern. Resistance at 110.25 initially.
Gold
The conflicting forces which are positive and negative drivers of gold continue to battle it out and subsequently there is a consolidation and increasing lack of direction. The long term uptrend of the past 18 months continues to just hold on, but equally the downtrend of the past eight weeks is also still in play. Once more the market had a look at $1300 and could not sustain the move yesterday as a doji candle formed to reflect the increasing near term uncertainties. The medium term outlook remains negative following the multi-month top pattern formation, whilst the long term pivot band $1300/$1310 is a barrier to a recovery. However the sellers just cannot get a grasp on the market. Initial support around $1289/$1290 is holding this week and bolsters the low at $1281.80. Momentum indicators are medium term correctively set up to sell into strength, but again, near term are increasingly benign (perhaps even hinting at a drift higher). This is a market in need of a decisive signal.
WTI Oil
After briefly threatening a recovery, oil resumed its decline yesterday as the market closed lower once again. The surprise inventory build in the EIA oil stocks of crude, distillates and gasoline certainly has not helped what looks to be a continued corrective outlook on WTI. Additionally, the resistance band $65.80/$66.65 also came in to provide a barrier for yesterday’s session before the market fell back. Momentum indicators remain in negative configuration with the RSI, MACD and Stochastics lines all pointing to further weakness and intraday rallies being sold into. The initial support around $64.25 held yesterday but risk remains to the downside and a breach would open the key April higher low at $61.80.
The Dow has indeed followed the S&P 500 in breaking out above its May high and suggests that the bulls are finally looking to force the issue again. A strong solid bull candle with a closing breakout above 25,086 pulls the Dow to an almost three month high and opens the next resistance at 25,449. There is a small uptrend formation over the last week which is now supportive around 24,930 today and the bulls will be looking to use any intraday weakness as a chance to buy. It would be a strong signal to the market if there were to be another positive close today, even more so with a decisive bull candle.
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