Risk appetite slips back but broader consolidation still holds

Market Overview

After weeks of elevated volatility with huge sell-offs and subsequent recoveries, there has just been an air of consolidation taking hold recently as markets have settled down. Taking a step back from the political noise of Brexit in the past few days, nothing much has really changed. Theresa May is still Prime Minister and she cannot get Parliament to agree her Brexit deal. The increased prospect of extending Article 50 has allowed sterling  degree of respite now. This comes as several major markets have developed consolidation ranges. The oil rally which had been helping equity markets higher, has stalled. The question is now whether an upside break on Wall Street (driven by a strong start to earnings season) can be sustained but also drag European markets with it. The moves in Europe this morning suggest markets are struggling to breakout. Interestingly, Treasury yields have also consolidated, along with a two week range formation on gold. One interesting mover is the euro, which has been steadily falling in recent sessions, and ECB President Draghi’s cautious comments yesterday amid headline inflation falling back and growth indicators under pressure. This risk negative mood has taken hold this morning  across major markets which is allowing the dollar bulls to continue their fightback amid a drag on higher risk plays.

Wall Street closed higher again and pushed further in recovery, with the S&P 500 +0.2% at 2616 whilst futures are back lower by around half a percent this morning, which is a drag on Asian sentiment with the Nikkei -0.2% and the Shanghai Composite -0.5%. European markets show similar traits with the FTSE futures and DAX futures both around -0.5% lower. Forex markets shows a mild risk negative outlook has taken hold as the dollar is broadly gaining across the majors, but it is the yen which is showing the most strength early today. In commodities, the tick higher on the dollar is a mild drag on gold, whilst risk negative is also a mild drag on oil.

The final reading of Eurozone inflation for December is the main focus for traders looking at the economic calendar in the European morning. Final Eurozone HICP is at 1000GMT and is expected to show headline inflation confirmed at +1.6% (+1.6% prelim, +1.9% final November), whilst core inflation is expected to be confirmed at +1.0% (prelim core +1.0%, November final +1.0%). US Weekly Jobless Claims are at 1330GMT and are expected to increase slightly to 220,000 (from 216,000 last week). The Japanese core CPI is at 2330GMT and is expected to drop back to +0.8% in December (down from +0.9% in November).

Chart of the Day – USD/CHF

Risk appetite improving has the Swiss franc under corrective pressure, this is dragging Dollar/Swiss higher and the move is now at a key crossroads. A rally in the past week has now pushed through the top of a two month downtrend channel, but can the move be sustained? There has been a basis of a pivot around the 38.2% Fibonacci retracement of the 0.954/1.0128 rally at 0.9903 in the past eight weeks and once more the rebound is trading around this pivot which is seen as a consolidation point. Momentum indicators are ticking decisively higher now and are effectively calling for an upside break. However, can the RSI make it decisively into the mid-50s and above (which would be an 8 week high)? This would complete the set as the Stochastics are leading the breakout and the MACD lines have crossed higher. A decisive close above 0.9903 would open the 23.6% Fib retracement at 0.9989 and the prospect of parity once more is open. A higher low at 0.9797 has been posted as support above the key low at 0.9713 (which came with a bullish engulfing candle) and the 50% Fib level (which has also previously been a consolidation point at 0.9834) will now be seen as an area for another higher low.

EUR/USD

The pair has been dropping consistently now for the past five sessions as the near term outlook has turned corrective. The market is now seriously testing the positive outlook as momentum indicators stand on the brink of decisive negative signals. The RSI has continually found a low around 40/45 in recent months, whilst the Stochastics have also bottomed in the low 40s. The MACD lines have just crossed lower. A pivot at $1.1420 has been a key near term gauge and is now a basis of resistance on the hourly chart. Support of the old range tended to come in around $1.1300 and another move back lower to test this would suggest the bulls are not in control. They need to move back above $1.1420 and find support above it otherwise the outlook which is now neutral will become increasingly negative again.

GBP/USD

Some of the volatile near term political drivers of sterling have now played out this week and the market is beginning to look more settled. Interestingly, this settling is back above $1.2800/$1.2815 which was an old basis of resistance and is now a key pivot to watch for the near term outlook. Holding above this level, in conjunction with positive bias on momentum means that there will be growing pressure on a medium term pivot around $1.2920. The tight nature of the candlestick bodies in recent sessions reflects an uncertain and tentative market though.

USD/JPY

With two solidly positive candlesticks in a row, the market is looking to build once more. However, can the bulls make a decisive closing breakout above 109.10. If so, then it would begin the process of a near term recovery, including an implied recovery target around 110.50. Looking at the momentum indicators, there is something building, with the RSI ticking back above 40, Stochastics bending higher and a bull cross buy signal on the MACD. It just needs a close above 109.10 to take the market to a two week high. Looking at the configuration of momentum indicators, any recovery would still be counter trend and a near term bounce within a medium term bear market, however, a recovery is certainly now threatening. Watch for the hourly RSI moving above 70 to reflect strengthening momentum for a breakout. A slip back under 108.60/108.75 near term support would be a disappointment now.

Gold

Can the bulls finally build momentum for a breakout? The market has been in consolidation for the past two weeks as support above $1276 has been built upon. Within the band there is now higher support at $1285, but can yesterday’s positive candle finally be a springboard for a breakout above $1298? The shackles are still on this morning. Momentum indicators have unwound within a consolidation which effectively helps to renew upside potential, but it could be an event-driven move to break the resistance. The hourly chart still suggests a ranging outlook has developed further and although there is a mild positive bias which points towards the next move being an upside break. The trouble is that once above $1298, the market is instantly into the long term pivot band $1300/$1310 which remains the key barrier to gains.

WTI Oil

The support around $50.50 which is the confluence of the top of the breakout band $49.40/$50.50, the 23.6% Fib retracement of $76.91/$42.34 and also this week’s low at $50.40 is an increasingly important level to watch. Tuesday’s bull candle rebound continued marginally higher after a mixed set of oil inventory data, but the bulls are just seeing a stalling early today and this could reflect a near term consolidation. This is becoming an important little near term range between $50.40/$53.30 as the momentum indicators consolidate amidst a mild loss of impetus. However, there is still a positive momentum set up on a near to medium term basis which suggests that near term corrections are a chance to buy.

Dow Jones Industrial Average

Now the market has broken through the barrier of 24,000 the recovery potential has been renewed and the market is pulling decisively higher again. Yesterday’s bull candle was the ninth consecutive positive candle (seen as the market closing above the open). There is a push towards the 50% Fibonacci retracement of the big correction at 24,333, whilst the old breakout at 24,000 is now a good basis of support. Momentum indicators remain strongly configured and the RSI is confirming the break to multi-week highs. A move above 60 would also be an interesting development to watch out for in the coming days. The next lower reaction high to test is at 24,828.