Euro remains firm in front of the ECB

Market Overview

The bulls run on equity markets took another shot in the arm yesterday as major markets all pushed strongly higher. Wall Street continues to push into new high ground, however it was the breakout on the DAX above 10,827 which was a multi month resistance that caught the eye. This comes with the euro remaining firm just before the ECB is expected to extend its QE program by at least six months at the meeting of the governing council today. However, the interest in the press conference will be whether the ECB is at the same time also beginning to prepare for the tapering of the QE program. This would be the surprise for the market and it is interesting to see the euro having started to push higher in the run up to the meeting. Last December the ECB disappointed the market by not extending easing, something that caused a huge rally on the euro. Could we be in line for a similar disappointment? It is also worth noting that the rally in Treasury yields is consolidating and possibly beginning to roll over. This is helping to pull the US dollar lower with the trade weighted dollar index looking corrective now. If the ECB disappoints, the dollar could go into reverse mode at least for the near term.

Wall Street was very strong into the close with the S&P 500 +1.3% at 2241, whilst the Asian markets were also positive (Nikkei +1.5%) helped by much better than expected China trade data in which both imports and exports beat expectations and were both positive for the month. European markets are holding on to yesterday’s gains in the early moves. In forex markets, the dollar is underperforming the major pairs and whilst the euro is higher in early moves, do not expect too much direction in front of the ECB. We can though expect elevated volatility this afternoon with the press conference. Gold and silver are also holding on to their gains with the weaker dollar, whilst oil has not yet managed to claw back any of yesterday’s losses.

Traders will be watching mostly for the ECB monetary policy which has the rates announcement at 1245GMT. The rates are all expected to be held flat with a 0.0% main refinancing rate, and the deposit rate at -0.4%. However the big volatility will be seen in the announcement of the QE program in the press conference at 1330GMT which is expected to be extended by between 6 to 19 months. There could also be interest in the size (currently €870bn per month and composition of purchases. The most volatility would come if the ECB also started to discuss tapering the purchases. US weekly jobless claims are at 1330GMT and is expected to rise to 272,000.

 

Chart of the Day – EUR/GBP

There have now been two sharply bull candles in the past three sessions and the corrective outlook is once more being turned on its head. The result is that momentum indicators are now accelerating higher with the Stochastics in a crossover buy signal and the MACD lines close. The RSI is also pulling higher. The market now needs to break through a reaction high within the sell off and this means resistance at £0.8577/£0.8595 is key today. A move above these levels would continue the move higher and reopen the old £0.8725/£0.8815 resistance. The hourly chart shows that the rally yesterday moved through the near term pivot at £0.8480  which has improved the outlook and this is now supportive today. Also hourly momentum indicators suggest that corrective moves are a chance to buy.

EUR/USD

After Tuesday’s corrective move the market has formed support again at the old key low around $1.0710 and is looking to push higher again. The near term euro recovery remains on. The breakout above $1.0685 this week completed a double bottom base pattern that implies a rally towards $1.0850. Yesterday’s positive candle has been followed by slight early gains today but this morning is unlikely to have too much direction in front of the ECB meeting. Furthermore, expect volatility this afternoon with uncertainty over what the ECB is likely to announce. The initial resistance is $1.0796 and a breach would re-open $1.0850 which was the old October support which is now resistance. The momentum indicators are progressing higher with the RSI looking to now push above 50, the MACD lines are positive and the Stochastics are positive too. The hourly chart shows the support above $1.0710 and positive configuration of hourly momentum. The neckline support of the near term base is at $1.0685 and the bulls are in control above $1.0660.

GBP/USD

With two corrective bear candles the market has pulled back towards the six week uptrend which has support that comes in around $1.2475 today. However the momentum indicators are now looking more mixed with this move as the Stochastics have rolled over. Despite this though the RSI remains positively configured and I am still confident that the bulls are in control of this corrective move which I believe will be bought into. The hourly chart shows that despite an initial support at $1.2623 being breached the market has held up well above the old pivot at $1.2557 which was important yesterday. This is the top of a key band of support $1.2515/$1.2557 which needs to remain intact for the bulls to justify their control. The hourly momentum is now more mixed and the near term corrective move may still have some run in it. The bulls need to get back above a 50 pip band $1.2650/$1.2700 to regain the impetus today for a retest of $1.2775.

USD/JPY

I have been discussing the concept of the dollar bull run looking tired now for several days and the formation of the daily candles continues to add to my concerns. The market is in consolidation mode at best now as yet another small bodied candle (this time bearish) has formed, whilst the early move lower today has continued the move. The momentum indicators continue to fall away and now the RSI is moving back below 70 which is arguably a sell signal. Furthermore, the Stochastics are in decline and the MACD lines are crossing lower. The momentum seems to be leading the market lower, however until the support of 112.85 has been broken, the market remains in consolidation mode. There is a band of around 200 pips that has formed and if this is broken it would imply a move back to 110.85, and that would include a test of the key 28th November low at 111.35. There is a slight bear bias on the hourly chart but interestingly the market has bounced from 113.11 which was a support within the recent range. Trading below the 113.90 pivot means there is a bear bias. I remain neutral until the price breaks the support, but the indicators are signalling a test of this key level.

Gold

I previously discussed the fact that silver was more advanced in a recovery outlook than gold and that silver does tend to lead gold, and now we find that gold is beginning to show signs of a recovery too. The downtrend that has been in place for the past three weeks is now being tested on the daily chart. This comes as the RSI has moved back above 30 and the Stochastics are crossing back above 20, both of which are near term positive signals. Yesterday’s bull candle on gold has helped to bolster the support leaving a higher low at $1165 above the $1157 low. The hourly chart shows the pick-up in the momentum signals, but the market now need to push back above yesterday’s high at $1180 and break above $1187. This would open the old key support turned resistance around $1200. I still see this as a near term rally that will give another selling opportunity.

WTI Oil

The oil price continues to roll over in the near term and pull backwards. I ultimately believe that this slide lower will find a band of support to start the next leg higher, however for now the corrective move is developing. The mixed EIA oil inventories report could not drive a change in direction as the bigger than expected crude inventory drawdown was balanced to an extent to the higher than expected gasoline inventory build. The market is now in reverse on the daily chart with a drop below the near term support at $50.18 which re-opens the band between $48.75/$49.20. The MACD lines have crossed lower and the RSI is unwinding. The hourly chart shows this loss of $50.18 support forms a 4 day head and shoulders top pattern and implies a $2.20 downside move. It will therefore be interesting to see if the bulls form the support in this bull market correction earlier than that in the $48.75/$49.20 range. Resistance is now at $51.20 above which aborts the top pattern.