Euro may need favourable economic data to prevent correction from continuing

Market Overview

There are mixed signals on Greece which are causing market fluctuations currently. Although Greek Prime Minister Tsipras appears confident that a deal could be close, other European sources appear to contradict this view, whilst there are also suggestions in an IMF memo that Greece will struggle to make June’s repayments to the IMF. This is hardly surprising given the fact that Greece had to engage a financial conjuring trick to pay its last €750m repayment. This put downside pressure on the euro and any further newsflow on the matter could continue to do so. FOMC member Charles Evans (a voting dove) seemed to suggest that a June rate hike was still a possibility although he believes that a rate hike should wait until next year. This helped to fuel US equities with Wall Street pushing for a third consecutive daily closing all-time high. Asian markets were buoyed by this with a positive day across the region as the Nikkei 225 closed 0.7% higher. The European markets have also started the day in positive mood.

In forex markets there is a little more of a mixed picture. The euro is again under a little pressure today, whereas many of the forex majors are broadly flat. The Reserve Bank of Australia overnight released its latest meeting minutes, which suggested that a lack of guidance did not rule out the possibility of a future rate move, whilst further decline on the Aussie was “likely and necessary”. The response has been interesting as after an initial reaction lower on the Aussie, the support has largely kicked in with the currency trading slightly higher now on the day.

Traders will be looking out for UK CPI inflation at 0930BST. The expectation is for another month of zero price growth, however there is the possibility of a slight dip into deflation territory, largely due to the timing of Easter last year. Final Eurozone CPI is also expected to come in at zero at 1000BST. The German ZEW Economic Sentiment could be the main driver of the euro this morning though at 1000BST. The expectation is for a dip back to 49.0 (from 53.3) which would be a disappointing 4 month low. In the US there is housing data at 1500BST, with the building permits expected to slightly improve on last month at 1.06m, whilst the housing starts are expected to bounce back to 1.02m (from 0.93m last month).

Chart of the Day – AUD/NZD

Both central banks have been instrumental in driving their currencies in recent weeks and with the RBA minutes overnight it is interesting to see the change in the Aussie/Kiwi cross. Already the reaction has resulted in an “outside day” daily range with the prospect now of a bearish engulfing candlestick if the weakness persists. (Aside, it is interesting also that the Kiwi strength is driving the move rather than any Aussie weakness). The daily chart shows now that after almost four weeks of gains, there are some possible corrective signals coming through with the posting of what looks to be a lower high at 1.0850 below 1.0880. The daily momentum indicators are beginning to roll over although there are no explicit sell signals yet, however I would look out for the RSI dropping below 60 as a sign of a correction. The intraday hourly chart is interesting as there has been a one month uptrend that is now breaking down following today’s move. The key support near term comes in at 1.0725 as a breach would be a 6 day low whilst also being below all the hourly moving averages and really would begin to question the bull control, arguably completing a small top pattern too that would suggest a retreat back towards the 11th May low around 1.0555.

EUR/USD

Despite a negative candle that posted a loss of well over 100 pips on the day, I do not see yesterday’s price action on the euro as being too much of a negative for the longer term outlook. However, the correction back now brings the euro into what I see as a key near term band of support. The range between $1.1200/$1.1290 is where I expect the next near term low to be posted if this bull run higher is to continue. That is exactly around where the euro is trading today, which means that today is an important day. The daily momentum indicators all remain in bullish configuration still with no discernible corrective signals yet. Furthermore, the hourly chart shows that momentum has now unwound. Every correction in the past month has found the hourly RSI bottoming out at or just above 30, whilst MACD and Stochastics are also in the process of potentially bottoming. I am subsequently now looking for the buy signals between $1.1200/$1.1290. Below $1.1130 would really put pressure on the bulls, whilst a breach of the key support band $1.1035/$1.1065 would put the bears back in control. I still see further upside in the euro and expect a retest of the $1.1466 high.

GBP/USD

I am still of the opinion that the correction in the past two days (around 180 pips so far) is part of the pullback towards the $1.5550 neckline of the big base pattern. There are no real long term corrective signals on the daily chart, with the crossover on the Stochastics slightly negative very near term but I see that as playing out the pullback All other momentum indicators are suggesting that the bulls are getting ready for a renewed upside push back to retest the recent $1.5814 high. On the intraday hourly chart I talked yesterday about the bearish drift on the momentum indicators. These studies have now reached levels around which the bulls look ready to support once more, with the hourly MACD shallowing, and the hourly RSI also beginning to pick up. I still see the breakout above $1.5550 as the key near term support and any buy signal today will be an opportunity for the bulls to resume control once more for further upside as I do not believe that this bull run has played out yet. Key support below $1.5550 comes in at $1.5390 near term.

USD/JPY

The dollar bulls had a strong day yesterday but once more it looks to have merely brought the pair back into a band of overhead resistance as part of the big trading range 118.30/120.85. There has not been any significant development in the daily signals, so it remains best to look at the intraday hourly chart as Dollar/Yen needs to be played on a very short time horizon currently, perhaps on a maximum of maybe across one day. The hourly chart shows that the resistance around 120.00 has held back the rally overnight and already the hourly momentum indicators are rolling over and beginning to show corrective signals. I still look to use the hourly RSI as the main indicator here, using the overbought/oversold signals as trading triggers. The latest run to 70 therefore gives another chance to sell, especially into the historic level of resistance around 120.00. Added to the fact that hourly MACD and Stochastics are also turning corrective within the trading range this latest rally looks ready. Key resistance levels come in at 120.27 and 120.50. A retreat back towards the old pivot at 119.40 can be expected.

Gold

The gold bulls have a difficult decision to make now. The price yesterday completed a closing breakout above $1224 (only just at $1225.20), however the daily candle posted was rather unconvincing with a close well into the lower half of the daily range as the price fell away into the close. I have been talking previously about the RSI pushing above (and holding above) 60, but for now the move is again reflecting a struggle for the bulls to convince. The intraday hourly chart shows again the lack of conviction in the run higher yesterday as the hourly RSI and MACD show bearish divergences with the recent highs. The initial support around $1221 is really being tested this morning and if the pressure begins to show consistent trading below $1220 there could be added pressure on $1210.80 which is now the key near term low. The bulls are struggling to hang on but the fight is not yet over. Resistance is now in place at $1232.20 as a near term battle for control plays out.

WTI Oil

Looking past some of the volatility near term, there is still a concern that there is bearish pressure building up. The initial spike higher early yesterday was turned around later in the day to leave another negative daily candle which was a third negative day in four sessions. Daily momentum indicators are beginning to show corrective signs, I would say watch for the RSI trading consistently below 60, the MACD lines are already in decline, whilst the Stochastics have lost the impetus. For now we must take this as a range play, however, in the past week or so there has been a lower high left at $61.85 (under the $62.60 May high), whilst resistance has also formed at $60.88. All the while, the pressure on support at $58.30 is building. Although it is dangerous to call a top pattern before it happens, the signs are there. A decisive more above $60.88 would help to avert the increasing pressure.