Market Overview
There is a sense of consolidation across major markets as traders look ahead to a crucial ECB meeting. The euro has been under pressure ahead of today’s European Central Bank monetary policy decision. After yesterday’s flash PMIs which showed a strong deterioration again across the Eurozone, but driven by declining outlook for France and Germany, the ECB has a real decision to make now. Bund yields have fallen sharply and yield differentials have been a drag on the euro versus the yen and the dollar. Euribor futures are pricing in cuts to the deposit rate in the coming months, and stand almost 50% probability of a 10 basis point cut today. Consensus is not there yet though and today could simply be a case of the ECB setting the groundwork for a move at the next meeting. A change to the statement with rates staying at their “present levels or lower” would be a trigger signal for the market.
The question is just how dovish a path does Mario Draghi set the ECB on today. With such uncertainty surrounding how the ECB will position, expect elevated levels of volatility across the Bund and the euro. In the UK, sterling traders looked at Prime Minister Boris Johnson with an open mind. His maiden speech did not change the narrative at all. A “one nation” Tory, with a “no deal” Brexit still on the table. Something for everyone then, well, on the Conservative side anyway. Sterling has drastically underperformed in the past couple of months. Can this honeymoon period of sterling rebound last? With the prospects of a no deal still very much at the forefront of trader concerns, it is unlikely that any strength will last.
Wall Street closed with a mixed session with Boeing (NYSE:BA) dragging the Dow lower, but the S&P 500 closed again in all-time highs +0.5$% at 3020. US futures are a shade higher again today by +0.1% which has allowed Asian markets a marginally positive session (Nikkei +0.3%, Shanghai Composite +0.3%).
In forex, there is all but no direction ahead of a crucial ECB meeting today, with AUD again a mild underperformer.
In commodities, gold has lost a couple of bucks from yesterday’s rebound, whilst oil continues to consolidate.
The ECB is the prime focus for the economic calendar today. However, the German Ifo Business climate at 09:00 BST will be closely watched as it has fallen to multi year lows recently. The market expects a slight decline to 97.1 in July (from 97.4 in June).
The ECB monetary policy decision is at 12:45 BST where there is not expected to be any move on rates, with the main refi rate at 0.0% (0.0% in June) and the deposit rate at -0.40% (-0.40% in June). The big interest will come with any statement changes and the ECB press conference for Mario Draghi at 13:30 BST.
The US Durable Goods Orders are at 13:30 BST which are expected to show ex-transport growth of +0.2% in June (+0.4% in May). Weekly Jobless Claims at 13:30 BST are expected to increase marginally to 219,000 (from 216,000 last week).
Chart of the Day – EUR/GBP
As Boris Johnson has been confirmed as the next Prime Minister of the UK, sterling has rallied. Coming on a day where the euro struggled (weaker flash PMIs) this has created a significant turn lower on Euro/Sterling. But for how long? We retain our outlook of medium term negative for sterling, but this move is counter to that. Having breached an eight week uptrend, a subsequent reversal pattern has formed on a move below support at £0.8950. A small head and shoulders top pattern completed and implies a 100 pip downside target to £0.8850. This comes with momentum indicators moving into sharp reversal, a slide on the RSI below 50, whilst MACD and Stochastics also accelerate lower. We see this move will provide the next opportunity to buy Euro/Sterling for further upside in due course. How the pair reacts to today’s ECB meeting will be key. The previous support at £0.8950 is now a source of overhead supply and resistance. A failed pullback to the neckline would be a chance for a near term sell and continue the corrective move. The increased selling pressure comes ahead of the ECB meeting today, but a move to test the support at £0.8870 is now looking to be the next technical support and an area between £0.0.8780/£0.8870 is where we see next medium support formation. A lower high at £0.9005 is now an important resistance to watch.
Breaching support at $1.1180 suggests the market has increasingly positioned for dovish potential from the ECB today. However, $1.1110 is the key floor of a five month trading range and is seen as a major support. The ECB meeting is a crucial medium term event for the euro today and is likely to drive elevated levels of volatility. Where the market closes today will be key. Technicals are all pointing to pressure on $1.1110. The RSI has fallen to three month lows in the mid-30s but still has room to fall. MACD lines are accelerating lower below neutral and Stochastics are negatively configured. Rallies that fail under $1.1180/$1.1200 resistance will be seen as an opportunity to sell. The hourly chart shows more of a mild negative drift in the past 24/36 hours with the market rather cautious ahead of the ECB. A close below $1.1110 opens $1.1000 as the next (mainly psychological) support area with $1.0850 the next key support line.
Cable bounced on Boris yesterday. However, can this honeymoon period for sterling last? We continue to look upon near term strength as a chance to sell. The downtrend of the past four weeks is being tested by this rebound and may even be broken today. However, momentum indicators are pointing to an ongoing struggle for the bulls to maintain any real traction. There is considerable near term resistance overhead at $1,2560/$1.2580 which needs to be breached for the bulls to realistically entertain any recovery of note. Until then, we are sellers into strength for further pressure on $1.2380 and likely below. The hourly chart shows initial resistance at $1.2520.
With the rebound rolling over under the lower high at 108.35, a neutralised outlook within the range of the past couple of months on Dollar/Yen seems to be in place now. The 21 day moving average (today at 108.08) has become a gauge for the outlook in recent weeks and given the flattened configuration, this is a ranging market. Trading under the 108.35 resistance keeps this outlook, whilst the support at 107.20 is also key to watch near term. Momentum indicators of the past four weeks have taken a neutral configuration, with the RSI oscillating broadly between 40/60 and currently a shade under 50. The MACD lines are also all but flat, just under neutral. The hourly chart shows initial support in the band 107.80/108.00 but this is a market waiting for a catalyst now.
Gold
A positive candle from yesterday’s session has helped to stabilise the near term slide back to hold the support of the six week uptrend. Trading above the rising 21 day moving average (which has been a basis of support in recent weeks) is also encouraging for the bulls. However, we are seeing in the past few days a small range of around 1% forming between $1414/$1429. This is squeezing the six week trendline(at $1419 today) now and means that something is about to give. With the ECB meeting today, gold is likely to find some further direction. We continue to be positive on gold for the medium term outlook and view near term weakness as a chance to buy. If the trendline and $1414 is breached, holding the pivot support at $1400 is increasingly important. Momentum indicators have been fluctuating in recent sessions with little real direction. Taking a step back, they are simply unwinding to help renew upside potential. A move back above $1429 re-opens the $1452 high.
WTI Oil
The conflicting fundamental forces on oil (positives: reducing inventories, Persian Gulf geopolitics, OPEC production cuts; negatives: US supply growth, global demand slowdown, trade dispute) mean that any movement on one factor can swing oil on a daily basis. However, in the past week the market has not managed to gain any traction in a recovery. Technically, the outlook is still corrective from the breakdown below the early July higher low at $56.05. Yesterday’s failure at $57.65 which formed a decisive negative candle leaves this as resistance. The support at $54.70 from last week’s low is a key gauge of support now as the market has effectively consolidated in the past week.
Even though the bulls will have been disappointed with yesterday’s decline, we continue to hold a positive outlook for the Dow. Even in decline, the daily candle was actually fairly positive, closing towards the day highs. The uptrend of the past six weeks is holding and we continue to expect there to be pressure on the all-time high of 27,399. Momentum indicators retain their positive configuration with the RSI constructive above 60 and Stochastics again turning higher from a position of strength. One indicator to keep an eye on though which is a bit of a caveat, are the MACD line, which are threatening to roll over. However, there is not enough in the MACD lines to shift from our view as we continue to advocate buying into weakness. Initial support at yesterday’s low at 27,190 is also around the support of the uptrend now. This also strengthens last week’s low at 27,069 as the first real support of note. A breakout above 27,399 opens blue sky again.
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