US dollar coming out on top again with negative bias to sentiment

Market Overview

According to reports coming out, the US and China trade delegations are set to meet for the latest round of negotiations on 10th and 11th October in Washington. For now, this is pretty much the only real factor that is a positive influence for market sentiment. Brexit remains a drag on risk appetite, with the UK Parliament an absolute shambles and little progress with the EU for moves towards an exit deal. President Trump is becoming embroiled in allegations of impropriety with a whistleblower suggesting a White House cover up over Trump’s conversation with the Ukrainian president. Politicial risk of impeachment remains someway off, but is just another drag on sentiment. The global economic slowdown driven by the trade dispute also shows little sign of any reversal. Subsequently, on a broad basis, there is an ongoing negative bias to risk appetite. With volatility elevated again, equities have found positive traction difficult to come by and the main winner in this seems to be the US dollar. This is reflected in a turn lower on both gold and silver this morning. A bounce back on equities has come with news of the US/China meeting, but with little expectation of any material progress towards a deal, the traction is limited. Risk aversion is hitting the euro and sterling now, whilst the removal of supply shocks in the oil market leaves traders focusing on a weak demand story and is therefore a drag again. Global markets need positive surprises on PMIs next week otherwise the malaise of risk aversion could continue.

Wall Street closed lower again, with the S&P 500 -0.2% at 2778, whilst US futures are a touch higher early today at +0.2%. Asian markets have been mixed again overnight, with the Nikkei -1.0% and Shanghai Composite +0.2%. There is a mild rebound on European markets again early today with FTSE futures +0.2% and DAX futures +0.3% but an the traction hold? In forex, there is little real direction, however, further negative drift for EUR, a mild rebound on JPY and AUD. In commodities, gold is a shade lighter by -$2 whilst oil is around -0.5% lower as the unwind continues.

It is another US-centric day on the economic calendar to end the week, with key focus on inflation. The Fed’s preferred inflation gauge, the US core Personal Consumption Expenditure is at 1330BST which is expected (as usual) to grow by +0.2% on the month of August (after +0.2% in July). However, this would pull year on year core PCE up to +1.8% in August (from +1.6% in July). There is also US core Durable Goods Orders (ex-transport) at 1330BST which is expected to grow by +0.2% in August (following a -0.4% decline in July). The revision to Michigan Sentiment will be keenly watched at 1500BST (especially after the big drop in consumer confidence earlier in the week. Prelim sentiment improved to 92.0 in September (up from 89.8 in August) and this is expected to be confirmed at 92.0 in the final reading.

 

Chart of the Day – AUD/NZD

For several weeks we have seen the Aussie consistently outperform the Kiwi. However, is this performance about to turn around again. After turning back from 1.0839 last week, the market has consistently fallen away. The move is now breaching the breakout support of the old April/May highs at 1.0730, but also the support of a six week uptrend. This comes with a move below the 21 day moving average (at 1.0725 today), but most notable are that the momentum indicators are leading the corrective move. The RSI is at a six week low, whilst a bear cross on Stochastics has been decisively confirmed, with a bear cross also on the MACD lines too. The MACD bear cross is the most pertinent as the last time a bear cross was see was back in April, when the previous big rally topped out and months of slide lower resulted. There is support with the 23.6% Fibonacci retracement of the 1.0263/1.0839 bull run (at 1.0703) but a closing breach would suggest corrective momentum is growing. There is now a resistance band 1.0730/1.0770 and a failure of this morning’s rally forms the next lower high within this range, it will be a further signal of ongoing correction. Subsequent support below 1.0700 is at 1.0620/1.0630.

 

EUR/USD

The euro is under growing pressure. There has been a decisive slump in performance of the euro in recent sessions that is breaking key technical levels now. Earlier in September the market bounced from $1.0925 on a couple of occasions, however, this floor has now been breached to bring the market to levels not seen since May 2017. The next key low is at $1.0850. Yesterday’s downside break also once more opens the bottom of the three month downtrend channel (today at $1.0840) as a potential target area. The concern is with momentum which is not only decisively negatively configured, but also with downside potential. The RSI is falling into the mid-30s (sell-off tend to move towards 30), whilst Stochastics are accelerating below 20 and MACD lines have once again crossed lower. Near term rallies are a chance to sell. The initial breakdown of $1.0925 is an initial basis of resistance this morning, but more considerable is $1.0965/$1.1025.

 

GBP/USD

The integrity of the recovery base pattern is being seriously questioned now. A run of four decisive negative closes in the past five sessions has dragged Cable back to the neckline support of the breakout around $1.2305. Given the deterioration on the momentum indicators now, this is a key moment in the medium term outlook. Sterling’s strong performance has been turned on its head and if Cable begins to trade decisively below $1.2280/$1.2305 support then there could be a much deeper correction on the way. Of concern yesterday was that the bulls tried to muster a recovery but it faltered at $1.2380 a level which is turning into a pivot now. The next session or two will be key. A continued failure under $1.2360/$1.2380 will ramp up the negative pressure. The hourly chart shows a mild consolidation this morning, but the negative bias is still present. A close under $1.2280 would be a bearish confirmation. Subsequent support is at $1.2230.

 

USD/JPY

There is an increasingly uncertain outlook to Dollar/Yen. The bull candle of Wednesday was followed by another mildly positive session yesterday, but seemed to fail to inspire the bulls. There is a resistance forming between 107.75/108.00 that the bulls need to overcome to regenerate positive traction. Momentum indicators are now increasingly inconclusive in configuration with the MACD and Stochastics lines flattening, whilst RSI is flat just a shade above 50. The bulls will point to the fact that the market is back above the 106.75/107.50 pivot band which lends a very modest positive near to medium term outlook (although there is little conviction in this view). There needs to be a pull through the resistance 108.00/108.50 to resume the bull control. The support at 107.50 is important to the bulls again.

 

Gold

Support of he four month uptrend is being broken this morning and this will be a concern for the bulls. The trend rises at $1503 today and there is a real struggle for positive traction following the failure at $1535 earlier this week. Trading just a shade below $1500 there is still a mild negative bias now to the neutral medium term outlook on gold, with the range between $1481/$1557 now over seven weeks old. Technical indicators are also pointing to an ongoing range, but a near term deterioration in momentum this morning needs to be watched. Momentum indicators are neutrally configured with the RSI stuck between 45/60, whilst MACD lines roll over a shade above neutral and Stochastics lines are losing traction around 50. However, they are slipping again, whilst the 21 day moving average (previously a trending indicator) has rolled over at $1510 and limited the recoveries in recent days. A closing (confirmed) breach of the uptrend would be a disappointment but should come as no surprise amidst this consolidation range. The $1481/$1484 key lows of the range are now open. The hourly chart shows that $1511 is a growing near term resistance under the mid-range pivot at $1517 again.

 

WTI Oil

Yet another negative candlestick was formed yesterday as the bulls again fail to hold any meaningful footing in the market. Intraday rallies continue to be sold into as 12 of the past 13 candlesticks come with the close below the open. There is a negative drift progressing and this is eyeing the $55.55 support of the 38.2% Fibonacci retracement. The build up of resistance overhead comes with the band $57.50/$57.75 and more recently the past couple of sessions have failed around $57.00. A closing breach of $55.55 opens the key lows between $52.85/$54.00.

 

Dow Jones Industrial Average

There is an increasingly mixed outlook on Wall Street that has built up in recent sessions. A run of contradictory candlesticks throughout this week reflect a choppiness that is forming a period of uncertainty. The bulls have lost the impetus of the August into September rally, but for now there is no sign of sustained corrective pressure. The market has unwound back towards the support band 26,515/26,695 and is holding ground now. With the support holding whilst the momentum indicators unwind, the bulls will be relatively content. It seems that the market is simply consolidating for now. Support of this week’s low at 26,705 is bolstering the 26,515/26,695 band, whilst the market is also still trading above the rising moving averages. The caveat is that there is a run of lower highs in place and the high at 27.080 from Tuesday needs to be breached to help re-invigorate the bulls. Momentum on the hourly cart reflect this as a period of contemplation amidst a very mild correction. Above 60 on hourly RSI would suggest the bulls pushing on again.