Sentiment more cautious amid newsflow of US/China talks

Market Overview

Market sentiment is slightly more cautious as a period of consolidation seems to be taking hold. With the talks between the US and China on-going there is a sense that newsflow is creeping back into the forefront of traders’ minds. Previously, this has been seen as a negative, but for now the talks seem to be progressing fairly constructively. There will be the potential for fluctuations and yesterday a comment from Donald Trump suggesting that he doubts the success seems to have been broadly overlooked by markets. Previously, during March’s time of elevated volatility, comments such as this may have hit sentiment hard. However, Treasury yields have barely budged, with the 10 year yield still above 3.1% whilst Wall Street slipped only slightly. What could play out though is that the recent strength of the US dollar may begin to consolidate as traders become a touch more cautious again. In spite of this though, yield differentials are still a key factor in driving the dollar moves (see the US Treasuries/JGBs spread correlation with Dollar/Yen).

China and US flags

Wall Street slipped a touch with the S&P 500 -0.1% at 2720 but the futures are higher this morning by 0.2% and this has driven a mixed session in Asia (Nikkei +0.4% supported by the weakening yen) whilst also helping to stabilize European indices. In forex, there is a slight slip in the dollar strength initially, with the euro doing better, however there is little real standout performer as the yen continues to struggle. For commodities, the gold bulls are again struggling to gain any real foothold in a recovery, whilst oil continues to grind out slow gains.

It is a fairly subdued end to the week on the economic calendar, however traders will be focusing on data out of the Eurozone this morning. The size of the Eurozone Current Account surplus for March is at 0900BST which is expected to remain at +€35.1bn whilst the Eurozone Trade Balance for March at 1000BST is expected to drop slightly to +€20.7bn (from +€21.0bn). Canadian inflation is at 1330BST and is expected to show year on year headline CPI remaining at 2.3%.

Chart of the Day – EUR/GBP   

The improved performance of sterling in the past week has coincided with the relative deterioration of the euro. This has resulted in a deterioration in the recovery on Euro/Sterling which now shows a building corrective outlook. The rebound on EUR/GBP from the low of £0.8618 has been running higher lows and higher highs in an uptrend channel, however this channel has now been broken as the market has strung together a run of negative candlesticks in recent days which has now also broken below the latest reaction low at £0.8725. Although the market has not closed below the support yet, there is a key deterioration in the momentum indicators that confirms the market now rolling over. There has been a head and shoulders top pattern formed on the Stochastics, whilst the MACD lines have also completed a bear cross. This would suggest that the high at £0.8845 will now mark a key medium term high on the pair and the market will begin to form a new trend lower, with rallies seen as a chance to sell. This could be a theme that plays out in the coming week. The hourly chart shows negative configuration now on the hourly momentum indicators with intraday rallies continuing to be sold into. With the early bounce this morning there is an initial resistance at £0.8760/80. Expect further pressure on £0.8710 support and a retest of the support at £0.8680.

EUR/USD

The sharp acceleration of selling of a few days ago has just begun to settle down as we head into the weekend. Yesterday’s loss of just 15 pips yesterday is all but being unwound as the Europeans head to their desks for the final time this week. Momentum indicators had threatened to take the market into spiral decline but have just begun to stabilize once more as the low of $1.1760 posted on Wednesday remains intact. However there is little real sign that the bulls are about to make a decisive comeback and this is a consolidation that looks to be just helping to unwind oversold momentum. The hourly chart shows momentum is unwinding back to levels where the sellers have tended to resume control, with the RSI back around 50/60 and the MACD back around neutral. There is a near term pivot resistance at $1.1850 and then $1.1900 making a near term sell zone, whilst the reaction high at $1.2000 is increasingly key near term.

GBP/USD

The rebound candle formed in yesterday’s session may not have been the strong bull reaction that the buyers would have hoped for, but the market still posted a gain of almost 30 pips on the session and once more the support of the range low around $1.3450 remains intact. There is still a sense that sterling is holding up well in the face of a broadly strengthening dollar but as yet there is little real sign in isolation that Cable is ready to embark upon a sustained recovery. With the market now trading in a 165 pip sideways band between $1.3450/$1.3615 for the past ten sessions the momentum indicators have plateaued, albeit in negative territory still. The hourly chart also continues to reflect this almost entirely neutral near term configuration too, with moving averages flat and converged, whilst hourly momentum oscillates in benign fashion. Coming into today, initial resistance is $1.3570 from yesterday’s high, whilst $1.3470 is initial support. Until we see a closing breach of the 165 pip range it is difficult to call a breakout with any conviction, however the sterling bulls are holding on admirably.

USD/JPY

The strength of the trend higher continues to pull the market through overhead resistance as the pair pulled above 110.47 yesterday to break the February high. The breakout from the consolidation band 108.60/110.00 implies 140 pips of upside and a push towards the next resistance at 111.50 and the run of positive candles suggests that the bulls remain in control for this move. Although on an historic basis Dollar/Yen tends to be a pair that trends strongly, perhaps the one caveat with the continued push higher is that the RSI is now above 70 and at a 12 month high. Can it sustain constant buying pressure? The bulls will point out that intraday corrections remain a chance to buy, with the trend support now in a confluence of support around 110.00 which is also where the latest breakout support is. The hourly chart shows the potential for an initial slip back today, however with the strong configuration of hourly momentum, weakness is a chance to buy which could help to renew upside potential. Initial resistance is at 111.00 this morning but a move towards 111.50/112.00 should not be ruled out.

Gold

It is interesting to see that the bulls have not been able to muster any real form of recovery on gold since the breakdown below $1300. Following the sharp bear candle on Tuesday the market has posted two candles almost entirely flat with yesterday being an almost perfect doji with a third consecutive close at $1290. The intraday rebounds have failed to ignite any buying and the resistance is growing at $1300 now. Momentum indicators remain negatively configured and rallies are a chance to sell. The hourly chart shows the MACD lines unwinding but unable to generate the momentum for a bull recovery, with the hourly MACD lines simply back to neutral and hourly RSI unwound to 50 area. The market is pushing lower lows still, with $1285 initial support. The net real support is around $1260 with the medium term target still around $1235. The long term pivot banc $1300/$1310 is now overhead supply.

WTI Oil

The bulls remain in control as yesterday’s intraday push above resistance at $71.90 again brought the market into new multi-year highs. Even though the initial breakout could not be sustained there is still a sense that the bulls are continuing to push the market higher. The run of positive candles in recent sessions was just dented by a flat close last night but the drift of higher lows of recent sessions continues to show how the buyers are still the dominant force even as the market moves to consolidate breakouts. Momentum indicators are continually bullishly configured to suggest that intraday corrections remain a chance to buy. The support of the uptrend of the past five weeks comes in at around the $70.00 psychological support today, whilst this week’s low at $70.25 adds to underlying support. Tenuous resistance from 2014 is between $73.25/$77.85.

Dow Jones Industrial Average

Having had the recovery scrutinized earlier in the week, the bulls are still trying to regain the upper hand once more. However posted another session above the old pivot band 24,500/24,580 helps to bolster the support. The support of this week’s low in place at 24,629 will be watched again today but it should not go unnoticed that the bulls are still yet to fill the 24,862 bear gap which also increases the resistance around 25,000. Furthermore, it could become ever more concerning that momentum indicators have lost their upside impetus in recent days, with the Stochastic bear cross form earlier in the week edging closer to a confirmation fall below 80. This seems to be a near term consolidation with the market at a crossroads. The MACD lines still ticking higher and RSI medium term improvement in the outlook there is a slight positive bias. However 25,000 is becoming an increasingly important barrier. The important support is at 24,500.