Tricky market consolidation continues as fx traders await Greek resolution

Market Overview

Financial markets are taking the uncertainty of the negotiations between Greece and its creditors rather calmly. Despite a very real risk of a default on 30th June, markets have held up remarkably well. There has been a lack of real selling pressure on key markets, whilst the classic havens of gold, the yen and Swissy have been ranging along with other markets rather than catching a bid. The next couple of days are crucial for the negotiations. Angela Merkel has warned of the gravity of the situation and said that a deal needs to be done by the weekend. National parliaments need to vote on the proposals and this all needs to be done before the deadline of Greece’s €1.6bn on Tuesday.

There has been a slight slip in equity markets over night with the S&P 500 down by 0.3% whilst Asian markets were also weak (although some of this could be due to the huge selling pressure in China. European markets have also started the day on the back-foot again and it will be interesting to see if there is another day of fluctuations like yesterday.

Forex markets have come into the European session with consolidation mode, but euro and sterling slightly lower. The Aussie and Kiwi have been the main movers as they have come off slightly in reaction to the selling pressure in China. The precious metals also remain weak. There is very little by way of economic announcements for traders to get their teeth into today, with only the revision to the University of Michigan consumer sentiment at 1500BST, with 94.6 expected which would be no change on the flash number. As ever though focus will remain on the newsflow over progress (or lack of) in negotiations over a deal for Greece.

Chart of the Day – EUR/JPY

A few weeks ago I spoke of a need for EUR/JPY to pull back towards the breakout level at 126.95. On the basis that old resistance is new support, any pullback would be seen as a chance to buy. The increasingly positive medium term outlook came with a base pattern and there has since been a form of consolidation on EUR/JPY which has allowed the bullish momentum indicators to unwind and renew upside potential, with RSI back at 50 and the Stochastics lines ready to bottom once more. The last two times that the Stochastics have bottomed around these levels it has been a harbinger for a decent run higher. I am also confident that the unwinding process has been done as the pair has held up so well. The last time I talked about EUR/JPY I spoke about looking for a buying opportunity in the range 137/138. The intraday hourly chart shows that near term momentum is not great though with negative configuration on hourly RSI and MACD lines, whilst there is a bear trend on the price in the past few days. Perhaps waiting for some of these indicators to begin to improve and/or a near term trend improvement, however I am confident that a buy signal is close.

EUR/USD

There are two ways in which markets can react to uncertainty. Firstly by selling off and secondly through consolidating. The euro is doing the latter. The last two days have been very quiet for the euro. There has been a little bit of intraday fluctuations, but the outlook is increasingly neutral near term as the euro continues to trade above the band of near term support around $1.1150. The daily technical studies are broadly flat, whilst even the Stochastics have started to flatten off. The intraday hourly chart shows all of this in greater detail, with the last couple of days in a tight 100 pip range. No-one really knows how the Greece negotiations will work out before Tuesday’s deadline, so traders are unwilling to take a view. There is little on the economic calendar that will provide direction today and it is likely that whilst markets will move on newsflow (positive or negative on a Greek deal) this may drift into the weekend.

GBP/USD

I must have put the mockers on Cable somewhat yesterday by suggesting that it was one of the few pairs that is trending, because since then it has joined the rest of them in consolidation mode. After three straight bearish candles, showing lower highs and lower lows, sterling has found some support at $1.5666. This is helping to ease the corrective outlook for now, but there is more to be done to prevent a continued retracement. The intraday hourly chart shows the importance of the resistance at $1.5800. This old neckline of the top pattern has been retested almost to the pip and has been strengthened. This is the key test today and if the bulls can mount a challenge and breach the resistance then this would go a long way towards restoring their control. For now the early morning moves suggests consolidation that has unwound the momentum, but with hourly studies showing a bearish bias still the expectation is for a continuation of the drift lower back towards a test of $1.5666 and then the supports at $1.5650/$1.5600.

USD/JPY

The range play continues as once more the pair has drifted back into the middle of the band. The past couple of weeks has seen Dollar/Yen trading in a sideways band of around 200 pips which broadly has conformed to the Fibonacci retracements of the 118.86/125.85 rally. The range conditions have resulted in the moving averages become increasingly neutral too. The hourly chart shows in greater detail the extent of how the Fibonacci levels are playing a role near term. The 38.2% level at 123.20 in the middle of the range is providing a pivot level and this seems to again be the case overnight. A sequence of lower intraday highs in the past couple of days has left resistance around the neckline of a small top pattern at 123.70. The range is still in play between 122.43/124.43 and corrections towards the bottom are seen as a chance to buy.

Gold

Gold has been in correction mode for a week now and yesterday completed its fifth consecutive bearish candle. This move has also now seen an intraday breach of the near term support at $1172.50 and also a close below $1175. These were two criteria for me that would suggest the sellers are in control for a real go at the $1162.35 support. I agree this is a bearish break however I am mindful that the pace of decline has slowed and on the intraday hourly chart there is a suggestion of a positive divergence on the momentum indicators. Although it is not perfect, the suggestion is that selling momentum could be waning and this could result in more of a consolidation taking over. I said yesterday that the $1180 resistance is the level to watch now as a move through this would re-engage the bulls once more. Prior to that, $1175 is also acting as a near term barrier as the drift continues lower and a dip below $1170 would re-open the recent lows at $1162.35.

WTI Oil

Still a lack of real direction in the WTI price, but two consecutive bearish candles have dragged the price back into the middle of the near term range once more. The fact that the 21 day moving average has now been broadly flat for the past month shows that there is a real dearth of signals on WTI. Perhaps the Bollinger Bands, which are now at their narrowest since the big sell-off began 12 months ago, may begin to signal pent up volatility to come. Narrow Bollinger Bands should be watched closely as a breakout can often herald a strong move. The hourly chart is giving few clues as to direction either, however the two days of bearish pressure may now see another test of the key near term support at $58.74 which is the 61.8% Fibonacci retracement of $56.83/$61.82. Until a breakout is seen it is difficult to make a meaningful analysis with such volatile consolidation continuing.