IMF downgrade set to encourage profit-taking to end the week

Market Overview

There is a slightly cautious mood that is taking over financial markets as we move into the final day of the week. This comes despite the fact that Wall Street just managed to claw out yet another all-time closing high last night as the S&P 500 edges ever closer to the magical 2000 level. However the news that the IMF had downgraded its global growth outlook for 2014 from 3.7% in April to 3.4%, could encourage a bit of profit-taking after some recent positive moves on equities. The IMF cited the geopolitical concerns of Ukraine and Iraq in addition to reduced expectations for emerging economies for its downgrade. Asian markets were mixed overnight and European trading has also started on a weaker note.

There has been very little movement in forex trading following the Asian session, although there is just the slightest hint of dollar weakness. Traders will be certainly looking out for the release of UK GDP which is expected to show that the UK economy has finally recovered to a position above where it had been prior to the financial crisis of 2008. The data released at 09:30BST is expected to show the UK grew 0.8% in Q2 with an annualised level of 3.1%. Also out this morning is the German Ifo business climate at 09:00BST which is expected to show a slight decline to 104.4 (from 104.8). The US session will be looking out for the Durable Goods data at 13:30BST which is expected to show data for June grew +0.4% month on month.

Chart of the Day – EUR/JPY

It looks like a rally could be underway. A bullish key one day reversal has formed which has left a low at 136.32 (which was just above the 136.20 key February low). This has also come with the RSI around 30 and whilst the Stochastics have also crossed and turned up. This suggests that the near term outlook is improving however there is significant overhead supply to overcome before the bulls can start to feel that a serious recovery is in progress. All moving averages are falling in bearish sequence and at the moment any recovery would simply look as though it would be a bear market rally. There is the double resistance of the key old support (now new resistance) at 137.66 in addition to the barrier of a 3 week downtrend also around 137.60 currently. I would still be viewing any recovery as a chance to sell as the outlook remains under serious pressure.

EUR/USD

There are mixed signals on the euro of late. In some ways yesterday’s session was a touch disappointing as an outside day was recorded after a new low was hit at $1.3436 and a subsequent rally was seen. However the rally could not be sustained and not the euro has formed a second consecutive “doji” candlestick which denotes uncertainty with the prevailing trend. The bears will argue that this is exactly what happened at the end of last week, but this time around the RSI is at 30 which leads to the prospect of a technical rally (although momentum is still very weak on MACD and stochastics). It is difficult and often unwise to bat against the trend and a stepped decline seems to be moving towards the $1.3375 implied target from the double top. However, I would say that the chances of a rally are improving but there needs to be a signal first. That would probably be a move above yesterday’s reaction high at $1.3484. The issue would be then the matter of significant overhead supply at $1.3500 and then $1.3550 and most importantly at $1.3575. It is unlikely that any technical rally would get very far before the selling pressure tells once more.

GBP/USD

The correction continues. Furthermore, yesterday’s move began to see an acceleration which took Cable below the key near term support at $1.7000. The buy signal I have been waiting for has failed to materialise so far and the rate could now retreat to the $1.6950 support. Overnight moves have been limited but there is an element of support that has crept in at $1.6964. The intraday hourly chart shows the impact that the 55 hour moving average (currently $1.7023) is having on capping the upside as the correction has continued over the past few days. I would still be happy to miss some potential upside in the search for a medium term buy signal on GBP/USD which I still expect to see. The daily momentum indicators continue to unwind nicely, and interestingly the RSI is now back at 40 which is where it reached during the key low in the end of May. The key medium to longer term indicator on Cable though remains the 89 day ma (now $1.6878) which has supported the last three major corrections. There is now resistance at $1.7000 to overcome immediately and then $1.7040.

USD/JPY

The dollar rally really took hold yesterday and dragged Doll/Yen through initial resistance at 101.60. The next barrier to a recovery around 101.80 still seems to be doing a job though as the recovery has begun to stall slightly overnight. There has been a slight pick-up in the momentum indicators due to this rally but there is still a bearish configuration and a feeling that this rally will ultimately be sold into. The falling 89 day moving average (now just above 102.00) has been the limit to the early July rally, whilst 102 is also a historic pivot level. I have said previously that the resistance band 101.60/101.80 was a sell-zone and perhaps a little speculative sell would not be the worst idea. The negative configuration on all the daily technical indicators suggests that selling into strength remains the best strategy for a retest of the lows around 101.00. The major near to medium term resistance comes around 102.30.

Gold

The correction in gold has entered its sixth day now and the price action from yesterday suggests an acceleration. The move came amidst the strengthening of the US dollar (especially after good employment data). The move has also taken gold back below the 144 day moving average (currently $1295.45). The positive configuration on the momentum indicators is also now being tested. The bulls will certainty now be looking towards the support band $1280/$1290 which I now believe acts as the last factor to protect the medium improving outlook for gold. A confirmed breach of $1280 and I would need to re-assess my outlook. The intraday chart does not look especially promising though with the hourly moving averages all in decline and weak momentum. The bulls have got a big fight on their hands, the big question is how much do they want a rally?