Market Overview
A degree of consolidation has beset forex markets although there is still a safe have bias as the trade talks between the US and China resume in Washington. Traders are seemingly waiting with baited breath as to how China are going to respond to Preside Trump’s renewed threat of tariffs. “They broke the deal”. Love him or loathe him, President Trump likes to play hard ball. Revelations that China has apparently backtracked on swathes of agreements in the negotiations have induced this response from Trump.
How the Chinese delegation, led by Vice Premier Liu He, reacts in Washington could be crucial for market sentiment in the months to come. If the two sides continue to underestimate each other, then strap yourselves in folks, the second half of 2019 could be a bumpy ride. We see markets retain their safe haven bias, with the yen classically outperforming. With volatility spiking higher, equities also remain under pressure. Technically, 2860 is a key pivot to watch on the S&P 500. The flip side of this is that if the Chinese play innocent and somehow rescue the trade agreement, there would be a significant relief rally. This would prevent the imposition on swingeing tariffs and isolationist policies between the world’s two largest economies. These next two days could be crucial.
Aside from trade, overnight, China inflation showed signs of a pick-up. Although the China CPI was in line at +2.5% (+2.5% exp, +2.3% last), there was a higher than expected China PPI at +0.9% (+0.6% exp, +0.4% last), which reflects a better outlook for the producers and another reflection that stimulus measures are having an impact.
Wall Street closed mixed, with the Dow all but flat, whilst the S&P 500 was a touch lower by -0.2% at 2879. However, US futures have a negative look to them this morning, around -0.5% lower. Asian markets remain under pressure with the Nikkei -0.9% and Shanghai Composite -0.8%. In Europe, the outlook is similarly cautious, with FTSE futures -0.3% and DAX futures -0.3%. In forex, there is a mixed look across the majors, with a slight move against USD, but once more JPY is the main outperformer. In commodities, gold remains stuck in consolidation, whilst oil has dropped back again following yesterday’s EIA inventory driven bounce.
US inflation takes the focus on the economic calendar towards the end of the week. Today we have the US PPI at 1330BST with factory gate inflation expected to tick back higher in April to +2.5% (from +2.4% which was an 11 month low in March). The US Trade Balance is at 1330BST and is expected to see the deficit slip further to -$50.2bn in March (from -49.4bn in February). Weekly Jobless Claims are at 1330BST and are expected to improve back to 220,000 from last week’s 230,000.
Chart of the Day – GBP/JPY
Sterling is corrective lower again as UK politics once more weigh on the pound. Coming as the market moves to the safe haven yen, this has pulled GBP/JPY to an 11 week low. The market had been finding buyers around 144.00 time and again in recent weeks but there has now been a decisive breakdown of support. A close well clear of 144.00 now opens the next move to the downside towards 141.00. The move comes with momentum indicators again turning decisively lower. The RSI failing at 60 now confirms the move, with a fall to four month lows. MACD lines have bear crossed below neutral and the Stochastics again crossed lower. Any unwinding rally towards the 144.00/144.85 pivot band is a chance to sell. The hourly charts shows a stretched market in the near term and any move to unwind the hourly RSI towards 50 and hourly MACD towards neutral would help to renew downside potential. A close above 114.85 would be needed to improve the outlook.
The euro continues to consolidate in the tight band of the past week. The support and resistance of the range is also tightening as technical signals become ever more neutral. Taking a step back though it is interesting to see that the market rebound is finding the overhead supply of the old lows between $1.1175/$1.1215 difficult to overcome. The formation of a near term downtrend (of seven weeks currently around $1.1230) is resistance overhead and the market is struggling around $1.1220 now. There is a drift recovery of sorts in the momentum indicators, but the RSI static around the mid-40s does not inspire confidence that this is a market about to burst higher. Rallies have consistently been sold into on EUR/USD and the prospect of a lower high at $1.1265 is elevated. Despite this, support is holding with $1.1160 and $1.1135 above the key $1.1110.
For the past eleven weeks the market has consistently seen $1.3000 as a key pivot. Much of the time it has been a key floor and so it was yesterday again. The selling pressure of the past three sessions has been held up by this floor around $1.3000 again. Although a recovery uptrend of the past two weeks has been broken, the fact that support around $1.3000 has held should not easily be dismissed. It is clearly a level the market is looking at now as a gauge. However, momentum indicators are dropping away again and a decisive close below $1.3000 would re-open the corrective momentum for a test of the lows at $1.2865. The hourly chart reflects the near term deterioration is still in process with lower highs and lower lows. Resistance is initially in a band $1.3040/$1.3080. Initial support beyond $1.2990/$1.3000 is at $1.2840.
There is still a safe haven bias through markets with the fear of what could turn into a full blown trade war between the US and China. Subsequently, the yen is still an outperformer. This is dragging Dollar/Yen lower. The run of negative sessions and negative candles continues and the market is now approaching the key support of the March low at 109.70. A decisive closing breach would be a significant moment. Looking at the continual deterioration in the momentum indicators the bulls will be fearing this breakdown. The RSI is a shade under 30 whilst most worryingly, the MACD lines are accelerating into bear configuration now. Intraday rallies remain a chance to sell. The hourly chart shows resistance at 110.25 initially, with 110.60/110.85 adding further overhead supply. A close below 109.70 opens 108.50.
Gold
The near term move higher hit the buffers of what is now an 11 week downtrend yesterday. Dropping away at $1291.40, is this another key lower high? A close towards the low of the session is certainly a disappointment for the bulls, but also formed what could be considered as a bearish “shooting star candlestick”. Whilst forming this signal within a range reduces its reversal potential, it does reflect the lack of confidence in the buyers. The failure of the attempted breakout above $1289 is also worrying. For a while, the outlook on gold has been to sell into strength. Another lower high, now under the $1300/$1310 long term pivot, would be considered a selling opportunity. There has been an improvement in momentum in recent sessions, but the moves have lacked conviction and suggestions are that rallies are a chance to sell. Gold is back inside the near term range and there is pivot support initially at $1278. This is the level to watch now today and a breach would re-open the recent lows at $1266.
WTI Oil
A surprise drawdown in the EIA crude inventories helped to support the near term outlook yesterday. However, it merely continues what is a growing consolidation on oil. It comes as the market has effectively traded sideways for the past four sessions. This consolidation is now breaking the recent two week trend lower, but not necessarily as there is about to be a recovery. The three and a half week top pattern completed below $62.30 is still significant near term. There is still a downside target of $58.00, although it is interesting that the bulls have defended the initial support band around $60. Daily momentum signals are actually beginning to reflect the consolidation, with the Stochastics beginning to bottom and RSI hovering in the mid-40s. How the bulls react to the resistance band $52.30/$53.00 will be key now for the near term outlook.
Wall Street is still struggling to build a case for recovery. After Tuesday’s decisive bear candle, the bulls tried hard to rebound, but their efforts were thwarted. Closing all but flat on the session, the bulls gave up around 150 ticks of earlier gains. This continues the move lower and the corrective move towards a test of the 76.4% Fibonacci retracement at 25,715. There is a continued deterioration in the momentum indicators with the MACD and Stochastics accelerating lower, suggesting that intraday rallies remain a chance to sell for now. However, it is also important to note that this is still an unwinding move within what is still a bull market. This will continue to be the case whilst key support between 25,210/25,275 remains intact. Initial support 25,780.
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