Brexit uncertainties remain as resignation hits sterling

Market Overview

Traders seem to be deeply uncertain as to how to view Brexit developments. A deal may have been secured between the UK and the EU, but Theresa May’s cabinet has significant reservations over the deal. Collective responsibility has meant that cabinet as a whole has given the deal the thumbs up, but there are many hurdles yet to be overcome. Interestingly, the reports out of the EU would suggest that an EU summit likely now on 25th November should not be too restrictive. However will Mrs May face a vote of no confidence? Also, if it even gets to that stage, there will be the week long debate in Parliament and subsequent vote on the deal which is the biggest stumbling block. The maths just do not seem to add up for Mrs May to get this through, at this stage. This deep uncertainty is why sterling has not been shooting higher, however, if this soft form of Brexit gets past UK Parliament then a decent sized rebound can be expected. For now though, Mrs May is facing her first resignation from her cabinet this morning and this is hitting sterling. Away from Brexit, there has been an interesting move against the dollar in the past day. With core US CPI coming in lower than expected, it would seem that inflation is still the big question mark over the Fed’s tightening cycle. Subsequently, Treasury yields have dropped back and we see yield differentials turning negative for the dollar for the time being. This has driven a euro rally, even though the ongoing brinkmanship of the Italian government remains a concern. Overnight there has also been a letter sent by the Chinese government to the US in response to US demands on trade. Although the contents of the letter have not yet been revealed, anything that helps to smooth the process towards an agreement will be seen as risk positive but also add to this potential dollar correction.

Wall Street closed lower again yesterday with the S&P 500 -0.8% at 2701 but with futures showing a degree of support, trading +0.2% higher, there has been a mixed to positive Asian session (Nikkei +0.2%, Shanghai Composite +1.3%). European markets are also mildly positive into the early session. In forex, there is a dollar negative theme throughout the majors this morning, with the euro still higher and the Australian dollar gaining after a positive set of employment numbers. Sterling has slipped back from earlier gains as the first minister since that cabinet meeting (a junior Northern Ireland minister) has resigned, could it be the first of several?  In commodities, this dollar correction is helping gold and silver higher, whilst it is interesting to see oil again supported after yesterday breaking the precipitous run of losses.

The consumer is in focus today with retail numbers for both the UK and US on the economic calendar. The UK Retail Sales (ex-fuel) are at 1330GMT with growth of +0.2% expected in the month of October which would mean year on year sales improving to +3.3% from +3.2% in September. There is a wave of US data in the early afternoon, with US Retail Sales at 1330GMT being the main focus. Consensus expects ex-autos sales to improve by +0.5% on the month after a monthly decline of -0.1% in September. There is also a couple of Fed sentiment gauges, with the New York Fed Manufacturing (Empire State) at 1330GMT which is expected to slip a touch to +20.0 from +21.1 which would still be very strong, whilst the Philly Fed Business Index at 1330GMT is also expected to dip back to a still very strong +20.0 (from +22.2). The US Weekly Jobless Claims at 1330GMT are expected to show claims still around record lows at 212,000 (form 214,000 last week). The EIA Oil Inventories are a day delayed this week and at 1600GMT with the crude oil sticks expected to show yet further inventory build of +2.6m barrels (+5.8m barrels last week). Distillates are expected to be in drawdown of -2.0m barrels (-3.5m last week) whilst the gasoline stocks are expected to be in drawdown by -1.7m (+1.9m last week).

 

Chart of the Day –NZD/USD

The performance of the New Zealand dollar has been remarkable in recent weeks. Outperforming the US dollar at a time in which the greenback has been so relatively strong. On NZD/USD the breakout above the pivot resistance at $0.6720 was a key move last week, but the fact that a near term correction then retreated to find support to bounce off the previous September high at $0.6700 simply adds to the constant improvement in the outlook. This now means that $0.670/$0.6720 is now a near term buy zone. Taking into consideration the continued strength in the outlook on momentum indicators, corrections are a chance to buy. The RSI remains supported above has held well above 60, whilst the Stochastics remain in bullish configuration and MACD lines continue to pull higher. A close above $0.6800 opens the next key medium term pivot at $0.6850, above which the medium term Kiwi recovery would be really gathering momentum.

EUR/USD

Since the decisive breakdown below $1.1300 support the outlook has materially become negative on a medium to longer term basis. Within this, there could be a near term technical rally, but this would be counter to the bear trend lower. The sharp move lower on Monday has now been followed by a decent recovery move which has unwound the euro. However there is a band of overhead supply between $1.1300/$1.1430 which the market has now unwound into and this is the key test. Will the sellers simply use this as another opportunity to sell? The momentum indicators are all set up for it. Since early October, when the renewed selling pressure took hold, the RSI has consistently failed under 50 and the Stochastics failed around 40. This unwinding move looks to be renewing downside potential. The hourly chart shows resistance at $1.1360 as a near term pivot and it will be interesting to see how the market reacts around here today. It would need a move above $1.1500 to suggest a recovery is serious.

GBP/USD

Intraday price volatility remains elevated as wild swings take Cable higher and lower amidst the uncertainty of how to read progress in Brexit. The net result of a very choppy session yesterday is that Cable once more trades around the middle of its $1.2660/$1.13300 range. This seems about right. There has been a mild edge higher overnight but politics and not technical indicators are the driver behind sterling right now. Given that, the momentum indicators are now hovering around neutral points on the daily chart, which again is about right. Support is in place at Monday’s low of $1.2825, whilst resistance of last week’s high is $1.3175. Any resignations from Theresa May’s cabinet in the coming days will have a negative impact on sterling.

USD/JPY

There is a consolidation that has set in on USD/JPY over recent days that is now turning into a correction. Neutral candlesticks with little direction earlier in the week came before yesterdays close lower and breach of a mini uptrend. Resistance under 114.20 is building now and despite the medium term positive configuration on momentum indicators, the near term loss of impetus is now turning corrective.  This comes as the RSI and Stochastics have tailed off within their positive configurations. The breach of the trend higher of the past few weeks has been seen and the market is tracking back towards the breakout supports 113.15/113.40. However, there is still a suggestion from the positive configuration on momentum that any near term weakness is likely to be short–lived. A correction that find support above 112.55 will be seen as another opportunity to buy for a retest of 114.20 which is preventing a retest of 114.55.

Gold

Although the market broke below the old key breakout support band $1208/$1217 earlier this week, there is a degree of support which has formed that has prevented a decisive move below of $1200. The fact that $1200 has been broken on an intraday basis is a concern, but without the decisive move lower on a closing basis there is an element of doubt still. The key will be on how the bears respond to the rebound into $1208/$1217 again. Having broken to the downside, this band is now a basis of resistance and if it is seen as a zone of resistance then the rally will be an opportunity to sell. It was interesting to see yesterday’s intraday high coming at $1216 before dropping back. The momentum indicators will have a part to play here as although they have slipped back recently, on yesterday’s bounce, there is a cross higher on Stochastics and MACD lines settling around neutral. A close back above $1217 would really improve the outlook. Support at $1196 is now preventing a drop back to $1180.

WTI Oil

A run of twelve negative closes in a row has been broken as WTI formed a positive candle and a close higher on the day. Finally a chink of light for the bulls. It is still far too early to suggest the market is now going to recover, but the fact that the market held on to Tuesday’s low at $54.75 is a positive and the prospect of that having been a capitulation move has improved. The momentum indicators are still deeply negatively configured, but the RSI has ticked higher from its record low (Monday’s close at 13.3 was the lowest in the history of my 35 year Reuters data). The market is consolidating today but we now look for near term technical rally signals. Yesterday’s high at $57.35 will be watched as initial resistance, as will the hourly momentum indicators which currently remain correctively configured. Continued support above yesterday’s low at $55.15 will also help.

Dow Jones Industrial Average

A fourth consecutive bear session and negative candlestick continues to drag the Dow lower as corrective momentum is gathering pace. The Stochastics have decisively crossed lower, with the RSI falling below 50 and the MACD lines are now threatening to track lower under neutral. The concern is that the market is now tracking lower highs, lower lows and trading under all the moving averages again. This suggests that the sellers are in control here. Breaching the reaction low within the previous recovery at 25,080 has effectively re-opened the 24,122 key Otober low again. The initial resistance is at 25,500 which is yesterday’s high. The Average True Range may be slipping but is still a sizeable 446.