Markets increasingly cautious ahead of major central banks

Market Overview

Markets are increasingly taking on a cautious stance over the prospect of how the major central banks will approach monetary policy in the coming week. Even though Fed Funds futures are suggesting only around 15% probability for a September hike by the FOMC, the risk appetite in the market is still in short supply. There was a slight move against the dollar yesterday which impacted across forex and precious metals, however this could simply be the beginning of a choppy consolidation in front of the FOMC next week. In front of the FOMC there is a batch of data today (and tomorrow) which will give the Fed its final steer. US Retail Sales, Producer Prices and Industrial Production are all due today and could drive volatility near term, but unless there are some significant surprises I believe that the markets are already setting a consolidation for the Fed.

However before the US data, there are two central banks in the European session to consider, although neither is expected to move on rates. The Swiss National Bank at 0830BST is not expected to change the deposit rate from -0.75% and is unlikely to cause too much of a stir. The Bank of England announces at 1200BST and is again unlikely to cut, having already cut by 25 basis points last month and increased asset purchases by £60bn. However, the BoE could lay the groundwork for further easing measures (would most likely be in November with the next Quarterly Inflation Report) which could pull sterling lower again.

Wall Street closed very slightly lower (S&P 500 -0.1%) but Asian markets were weaker overnight with the Nikkei -1.3% as the yen bounced back. European markets are also cautiously weaker at the open today. As the European session takes over, having been very quiet on forex markets overnight, the dollar is beginning to gain some early ground again (although a very slight outperformance for the yen reflects minor risk-off sentiment), with gold and silver beginning to dip away again. Oil has unwound a touch, bouncing after yesterday’s big sell-off.

Aside from the central banks, UK Retail Sales are at 0930BST today and are expected to show a month on month drop of -0.6% for the ex-fuels, with the year on year back from +5.4% to 5.0%. Final Eurozone CPI for August is at 1000BST and is expected to stay at +0.2% for the headline and +0.8% for core. US Retail Sales are at 1330BST and are expected to be +0.2% for the month (ex-autos). The Philly Fed Business Index at 1330BST one of the few regional Fed surveys that is showing positive for the moment and is expected to stay positive but only just at +1.0 (last month was +2.0). Weekly Jobless Claims are expected to stay around where it has been for the past few weeks at 265,000. US Industrial Production is at 1415BST and is expected to drop by -0.3% for the month with capacity utilization expected to also decline to 75.7 (from 75.9).

 

Chart of the Day – Silver

Silver remains in a medium term range following the long term breakout above $18.50. The support that formed in late August was seen as a pullback correction that was set to give the buyers another opportunity to get long for medium/longer term gains. However the bulls have been unable to pull ahead and the dollar strength of recent sessions has dragged silver lower again. The move back below the pivot at $19.20 would have been a disappointment for the bulls as this is now seen as a watershed for the outlook which remains choppy over the medium term. The mildly positive candle that formed yesterday has bolstered near term support at $18.70 (Monday’s low) but needs to drive a rally back above $19.20 to encourage the bulls once more. Interestingly, the 89 day moving average (around $18.61) has been a great basis of support over recent months and continued to underpin the trading and is now a key indicator for the bulls. The hourly chart shows an improvement in momentum but needs the hourly RSI moving above 60 consistently and the MACD lines sustaining a positive configuration for a more positive outlook. The hourly chart also shows that a move above $19.28 would complete a near term base pattern and imply a recovery towards $19.85. Below the support at $18.70 would be a blow but the bullish outlook remains preferred whilst above the August low at $18.45.

EUR/USD

Perhaps in keeping with how the euro has been trading in the past few days, a retracement candle was formed yesterday which unwound the previous weakness and neutralised the technical outlook once more. The session also saw a move above the previous session’s high for the first time in four candles which again has reduced much of the corrective look to the chart. The daily technical indicators remain very neutrally configured. The RSI remains very benign at of just above 50, whilst the MACD lines are also becalmed and the Stochastics also bang on neutral. This state is likely to continue in the run up to the FOMC announcement next Wednesday (perhaps with the caveat of US Retail Sales and CPI in the next couple of days). The hourly chart shows support at $1.1200 and further neutral configuration on hourly momentum. Resistance is at $1.1285 and $1.1325.

GBP/USD

Sterling has been drifting lower for over a week now with a corrective outlook within the medium term trading range. Having formed a high at $1.3445 the pair has left a lower high at $1.3345 and with momentum indicators continuing to drop away the suggestion is that rallies should continue tom be sold into. The hourly chart shows a band of resistance that starts around $1.3250 which I expect to capture the next lower high, with the overnight rally reaching $1.3278 before turning lower. This move looks to have unwound momentum and helped to renew downside potential for the next move lower. A retest of yesterday’s low at $1.3135 can be expected. There are two big caveats though today with UK Retail Sales and Bank of England monetary policy. The retail sales last month massively surprised to the upside and Cable shot higher but a repeat of a strong number is not expected today. The Bank of England will stand pat but may hint at further easing measures to come which would be a drag on sterling.

USD/JPY

I discussed in my daily video yesterday that the prospect of Dollar/Yen breaking its downtrend channel in front of the FOMC/BoJ meetings next Wednesday was quite high. The channel is already being threatened but I see a consolidation forming (albeit perhaps quite a choppy one) that would naturally break the downtrend, but I do not see this as a signal to take much notice of. The market seems to be fairly settled now above the 101.18 support but cannot find the traction for any sustained move above 103.00. Subsequently yesterday’s intraday move to 103.35 was sold into and the market has dropped back again. The momentum indicators are settling in around neutral with the RSI bang on 50 and MACD lines at neutral. There is only a slight negative bias on the Stochastics. The hourly chart is equally neutral and there seems to be little real appetite to chase the market higher. A near term pivot around 102.00 is supportive today. Key resistance for a significant breakout remains 104.30.

Gold

A first positive candle in six sessions has just calmed some of the near term selling pressure on gold. Leaving support at $1315.20 the market looks to be starting to consolidate, however there is still a mild bearish bias in the near term to consider. The hourly chart shows that the move back below the pivot at $1330 is now resistance, whilst another pivot at $1325 is also providing a barrier to gains overnight. The hourly momentum indicators have unwound to levels on the RSI and MACD lines where in the past few days the sellers have returned. The US Retail Sales data this afternoon could be a driver with any positive surprise driving a stronger dollar and subsequently gold lower. Below $1315.20 re-opens the medium term supports again, with $1302 key.

WTI Oil

As usual on a weekly basis the EIA oil inventories created volatility for oil yesterday. The unexpected crude oil inventory drawdown of -0.5m barrels (+4.0m inventory build expected) was supportive for oil initially, but then a big turnaround (supposedly on the big inventory build in distillates) resulted the price again completing another strong bearish candle. The downside pressure subsequently continues and the momentum indicators are showing bearish traction now with the Stochastics and RSI falling. The hourly chart shows that a very well defined downtrend has formed in the past week and was hit almost to the cent yesterday before the late sell-off. The configuration of the hourly momentum shows how rallies continue to be sold into. There is now resistance in the $44.55/$44.75 area which was previously supportive, with the 5 day downtrend also providing a barrier around there today. WTI has just rallied off $43.42 this morning so this is the initial support but a retest of the ey low at $43.00 cannot be ruled out. Below $43.00 the next support is $41.10.