Equities and the dollar see profit-taking after recent recovery gains

Market Overview

Financial markets around the world are beginning to settle down after the recent geopolitical scares regarding terrorism in Ukraine and conflict in Gaza. These events may still rumble along in the background and give the odd fright to risk appetite every now and again but the broad risk element appears to have been contained. It appears as though the next move will come with how stringent the “stage 3” sanctions on Russia are.

Wall Street closed in positive territory with the S&P 500 seeing an intraday all time high but with a 0.5% gain on the day could not quite make a clean break. The results of Apple were mixed against expectations, with a beat on revenue but a miss on earnings for the largest company in the world (as measured by market cap). Asian markets were slightly mixed overnight, with European markets also trading slightly lower in early exchanges with some minor profit-taking after yesterday’s strength.

The US dollar is coming under some early pressure today in forex trading as it pares some of its recent gains. With dollar weakness against all major pairs, the main move has been seen against the Aussie dollar which is almost half a percent higher after Australian CPI came in line with expectations at 3.0% overnight. Sterling traders will certainly be watching out for the Bank of England meeting minutes which are announced at 09:30BST. Coming into the second half of the year (an now six months before the market expects a rate hike) if there are any hawkish rumblings such as one or two members voting to raise rates then this could give sterling another boost. There is no US data today, but there is Eurozone consumer confidence at 15:00BST (-7.5% exp) whilst the Reserve Bank of New Zealand is expected to hike rates by another 25bps to 3.5% at 22:00BST.

Chart of the Day – USD/CHF

Interestingly, just as there has been a significant break seen on the euro (see below), the Swiss franc is also under serious pressure, with the two currencies closely correlated. Dollar/Swiss is breaking out. The spike high that was recorded on the day the ECB engaged its monetary easing measures is now the resistance at 0.9036 that needs to be breached for a confirmation. Subsequently, the outlook for the US dollar is certainly improving. All moving averages are rising in bullish sequence, whilst momentum indicators are strong but also show further upside potential in the current move. Unlike with the euro, there is no explicit pattern that we can derive a target from, although arguably the double bottom completed in mid-May (remember that double top formed on EUR/USD around the same time?) gives an implied target of 0.9200. There is now a good band of intraday support between 0.8970 an 0.9000 that can be used as a chance to buy if a minor correction does set in. However the chart of Dollar/Swiss does look to be breaking to the upside once more.

EUR/USD

Yesterday was a big day on EUR/USD. The selling pressure on the euro has finally told as the rate has fallen to a new 8 month low. Not only that but with a close below $1.3475 a huge head & shoulders top pattern has completed that implies a medium/longer term target of $13000. A two day close below the $1.3475 old support would be preferable but the strength of the pattern looks significant, with all moving averages falling in bearish sequence and momentum in bearish configuration. The daily RSI is now around 30 which is towards where the technical rallies have set in previously so this needs to be kept in mind. The intraday chart shows a minor consolidation has built overnight but no real attempt at a rally yet. There is now overhead resistance initially starting around $1.3500 and up towards $1.3550 before $1.3575 and $1.3600. These are all areas that could see a near term recovery into. It is difficult to go against the selling pressure for the time being, with the implied target from the original double top still at $1.3375. However, Should there be a technical rally, I would not expect it to last for too long before the sellers resume control.

GBP/USD

The drift back towards the support band $1.7000/$1.7060 has been seen over the past week. In each of the past three sessions able has dipped below $1.7060 intraday only to close above. This suggests an appetite for the buyer to support. Also as an aside, amidst all the dollar strength of the past few days Cable has held up fairly well. On the intraday chart I have previously talked about the falling 55 hour moving average providing a basis of resistance over the past few days which continues. However there have been signs of sterling strength once again. The hourly momentum indicators are looking to improve, with the 14 hour RSI at a 4 day high and could be the early sign of a recovery. I continue to expect that the support in this $1.7000/$1.7060 area will hold the correction and I am waiting for a buy signal. There is a fundamental event that could drive the price this morning, with the Bank of England meeting minutes. A hint of a hawkish leaning on the committee could be the trigger for that buy signal.

USD/JPY

Last week’s close below 101.30 suggests that the pressure is mounting and now the dollar is running out of steam at successively lower levels against the yen. The falling moving averages are prohibitive to a dollar recovery and for a second time in a week it appears as though the 21 day ma has capped the upside. Momentum indicators are in negative configuration and suggest that a strategy of selling into strength is advisable. Yesterday’s peak at 101.60 just goes to strengthen the resistance with the next level above at 101.80 equally as significant. A failure to breach these levels would just add to the pressure on the downside which is now ever growing. The dollar is struggling to gain any sort of traction to the upside and selling into strength for a retest of the lows around 101 and then 100.74 (key February low) seems the best strategy.

Gold

With geopolitical events just beginning to calm down in Ukraine, the gold price is settling once more and for technical traders that should be a good thing. The technical supports that held amidst the volatility of a week ago was the rising 144 day moving average which is still an excellent gauge and is now at $1294.70. Despite the slight drift lower in the past few days, I still see the longer term technical outlook improving, with the broken downtrend that dates back to October 2012, rising 144 day ma and longer term positive configuration of the momentum indicators. That means that if the bulls are to stay in control then support needs to be found at the very least above $1280 which is a historic level and hopefully above the 144 day ma. A higher low above $1291.70 (15th July low) would be ideal but we must wait to see how much of a “war premium” the market gave to gold recently. My expectations are that support will begin to arise soon and gold will rally to retest the initial reaction high at $1324.44 before further gains are seen.