Sentiment cautious ahead of PMIs as the dollar remains strong

Market Overview

The sentiment remained strong going into the weekend, but there is an element of caution that has taken hold as the first week of the month beckons. This can be understandable with such a vast array of crucial data set to be released, which culminates in the ECB on Thursday and Non-farm Payrolls on Friday. Asian trading has been slightly hampered today by a public holiday in Japan which has also resulted in some thin trading in the yen. However the data released already in the region has been mixed at best and has not helped to drive markets either. The HSBC China Manufacturing PMI came in line with estimates at 50.4, whilst the Non-Manufacturing PMI dipped slightly to 53.8 which is a 6 month low. This data has resulted in slight losses in Asian stock markets, whilst European indices are also slightly lower in early trading.

In forex trading, the dollar is once more strong across the board against the major currencies, with the Aussie dollar being especially hit after building approvals significantly missed expectations overnight. Traders will be looking towards the manufacturing PMIs for the Eurozone (early morning), the UK (at 09.30GMT with 51.4 expected) and US ISM Manufacturing (at 15:00GMT and 56.2 expected).

Chart of the Day – AUD/USD

The pattern of consolidation that has been in process for over a month between 0.8641 and 0.8911 continues. The overnight price action has put a bit of the pressure back on the Aussie, but for now the key support at 0.8641 remains well intact. However, the intraday hourly chart is showing a deterioration within the price action since trading began today and an immediate barrier has formed around 0.8760 and up towards 0.8790. The longer it goes that this builds as an area of resistance the outlook will begin to shift to a more negative bias within the month long consolidation.

EUR/USD

Having breached the key support of $1.2500 on Friday on an intraday basis the weakness on the euro has been threatening. Once again the move below the support has been seen and it appears as though the appetite is there for further downside. It is possible to derive the next downside target from the small head and shoulders top pattern formed over the past 3 weeks above $1.2604 which implies $1.2325. The concern once more I that the momentum indicators are confirming the breakdown, with the MACD lines especially worrying having just turned down from below neutral. There is little price support until $1.2250, but in all honesty once $1.2500 is consistently cleared then the crucial low of $1.2040 will be looming.

GBP/USD

The pressure on $1.5873 is mounting. Overnight the price has been showing weakness and it certainly looks on the intraday hourly chart that once more the old band between $1.6000/$1.6040 is doing a job again, now acting as the basis of resistance. The hourly momentum indicators have all now taken on a negative configuration and rallies are now being sold into. As with the euro, there is a small top pattern (completed below $1.6000) that implies a downside target of $1.5820. Although daily momentum indicators maintain a negative configuration it is not an aggressive configuration currently. Despite now not being as bearish as the euro chart, there is a negative bias still to the daily chart that suggests a test of $1.5873. However with the downtrend recently having been broken it will be interesting to see if the bears can continue to drag the price even lower.

USD/JPY

An incredibly breakout on Friday was seen after the intervention by the Bank of Japan weakened the yen and took Dollar/Yen soaring through 110.08 and to the highest level since 2008. The next real stop off is around 115 which was a resistance from December 2007. There is an initial Fibonacci level at 161.8% of the 110.08/105.18 correction which comes in at 113.11 and interestingly overnight there has been consolidation around 113.00. Momentum indicators remain strong and it is difficult to suggest the yen will not weaken further. There is little real support for a correction until back at 110.08, but there are minor levels at 112.47 and 111.86.

Gold

The weakness in the gold price has accelerated over the past few days and having breached the key support at $1180 on Friday, the precious metal is now trading at its lowest level since July 2010. Furthermore, technical indicators are not favouring for an immediate rebound, with RSI suggesting further downside, MACD lines beginning to fall and Stochastics weak. The intraday hourly chart shows a hint of support at $1161.60 which has held overnight, whilst a rally above $1177 would also suggest a near term improvement, but expect any rebounds to now be sold into. The old key support above $1180 now becomes the basis of resistance. Now the key support at $1180 has been taken out there is little to suggest there will not be further downside towards $1100 in due course.

WTI Oil

Although there has been no decisive breakdown of the support at $80 there is still a negative bias to the consolidation over the past 3 weeks and rallies continue to fall over at lower levels. The pressure on $80 therefore continues, with the intraday low at $79.44, even though there is yet to be a close below the $80 level. Momentum indicators remain weak and there is still little prospect of a meaningful rebound. The latest reaction low is at $82.80 and this should be seen as a level to work with as a key level near term. If there were to be a close below $80 then it could be a catalyst for further downside towards the June 2012 low at $77.28.