Dollar weakness taking hold ahead of PMIs

Market Overview

There has been a mixed outlook on equities taking hold across markets this morning along with some dollar weakness ahead of some crucial PMI data releases. After a strong run in recent weeks, there are a few signs of the dollar run stuttering now. A sharp dip back on Treasury yields yesterday reflects a lack of decisiveness, whilst the gains seen through the yen and gold also reflect a cautious market. Equities which had pushed so strongly higher last week are moving to correct some of those gains too. The first trading day of the month is jam packed with Manufacturing PMIs and the early signs are not all that positive. Overnight we had China announce both official PMIs for manufacturing and services, with 50.1 and 53.1 respectively, whilst the unofficial Caixin Manufacturing PMI disappointed at 49.2. Traders will now be looking out for manufacturing PMI data across the Eurozone, UK and the US ISM data.

Wall Street was mildly lower into the close with the S&P 500 -0.1%. The Asian markets were mixed to lower with the Nikkei especially under pressure down 1.6% as the yen strengthened. European markets are cautious in their early moves. In forex markets the dollar is coming under pressure across the board with the yen strength the standout. The Aussie is also an outperformer after growth data beat expectations with +1.1% for Q1, which will reduced some of the pressure for rate cuts from the RBA. With the dollar weakness of the past 24 hours it will be interesting to see if gold and silver can gain traction on their rebounds from yesterday.

The final Eurozone Manufacturing PMIs are throughout the early morning with the regional data at 0900BST expected to be in line with the flash readings of 51.5. UK Manufacturing PMI is at 0930BST and is expected to improve slightly to 49.6 (from 49.2) but would be crucially still below 50. The US ISM Manufacturing is at 1500BST and is expected to dip slightly to 50.4 (from 50.8).

 

Chart of the Day – EUR/GBP

Two weeks ago, Euro/Sterling broke below the key support at £0.7690 to complete a large head and shoulders top pattern which implies around 400 pips of downside will be seen in the coming three to four months. This pattern formation is the market moving increasingly to price in a victory for the Remain camp in the EU referendum. However, moves on a day to day basis have tended to move with the latest polling but the technicals continue to suggest that rallies will be sold into. Yesterday’s bullish engulfing candle muddies the waters a little but for now the trend is lower and unless there is another decisive bull candle today, this is another rally that is likely to be sold into. There is now a key resistance band of £0.7690/£0.7750 which needs to be watched as it has medium to longer term significance. The top of the band at £0.7750 a historic key pivot level on Euro/Sterling (which was the 2012 low, a key ow in October 2014 and has now subsequent pivot throughout 2016, not least of which catching last week’s high). Although there has been a slight tick higher on yesterday’s move, momentum indicators remain bearishly configured with the RSI tending to fail in the 50s, whilst the MACD lines are falling below zero and Stochastics also negative. Despite the hourly chart showing a near term recovery yesterday above £0.7640 which opens a rebound towards $0.7720 this would be right in the middle of the “sell-zone” and with it increasingly looking to be a bear rally now the resistance band £0.7700 would look interesting for the bears. Initial support is with yesterday’s low at £07560 and I expect this to be retested in due course.

 

EUR/USD

Once more yesterday the sequence of lower highs kicked in and the rally was sold into. What had looked to be a possible bull recovery was snuffed out into the close as a late intraday selloff meant that there was a negative daily candle formation. The pressure is subsequently mounting back on the long term pivot band $1.1050/$1.1100. The momentum indicators remain bearishly configured with the RSI firmly below 40, the MACD lines negative and the Stochastics bumping along well below 20. The resistance at $1.1215 is therefore strengthening with yesterday’s peak of $1.1173 adding to the overhead supply. Expect further pressure on $1.1100, whilst a break below $1.1050 would re-open $1.0800. There is further key resistance at $1.1245.

 

GBP/USD

The price action seen with yesterday’s huge bearish engulfing candle is the risk that will be faced trading Cable in the next three weeks. The move came on a Brexit poll which then sparked off an intraday sell-off of over 250 pips. This now means that sterling is back to test the uptrend built up over the past 8 weeks. Technically it is hard to ignore the bearish implications of such a strongly bearish candle, however it is always good to see confirmation and so far today the market has been very cautious, with little real move. The support to watch if $1.4440 as this is the latest key reaction low within the uptrend and if this breaks it will suggest a loss of control by the bulls. The momentum indicators are now questioning the move higher, with the RSI back around 50 and the Stochastics having turned down again. The truth is that the coming weeks in front of the EU referendum will be choppy for sterling and whilst there is a positive bias there will be bumps along the road. Below $1.4440 is support at $1.4400 but $1.4330 is key.

 

USD/JPY

Have the bulls lost control again? The early European traders have come in today and sold Dollar/Yen. This has not yet changed the outlook for the medium term recovery, but the move certainly poses a few questions as to how strong and sustainable the rally is. With the US on public holiday on Monday the push higher to 111.43 would always need to be confirmed, but that was not seen yesterday as a drifting corrective candle is being followed by a sharp early correction today. This move (again if confirmed by a closing negative move) is negatively impacting on the Stochastics (an early warning signal), however whilst the support of the key reaction low at 109.10 is intact, the bulls can be justified in arguing the continuation of higher lows. Seeing how this decline today develops may be wise therefore as even the support at 109.50 remains intact for now. The overnight trading has left resistance at 110.80 which will become a reference point today.

 

Gold

A first positive candle in 10 sessions has given the bulls some sort of respite from the selling pressure. The move has happened as the safe haven plays have just started to find a bit of support in the past 24 hours. However, I would not be too quick in jumping back in on the long side as there is much more that needs to be seen for this to be something more than a dead cat bounce. The Stochastics may have ticked higher but there would need to be a confirmed buy signal (cross back above 20), whilst the RSI is still below 40. The hourly chart shows a near term improvement, but also that there is now overhead supply between $1217.25 and $1233.60. There is also the old pivot band around $1224 to consider. The old support at $1208 is still a level to watch for sustained support to build, whilst the key near term low is $1199.60. For now I am neutral on gold.

 

WTI Oil

The bull trend remains strong as the sharper uptrend in place since $37.60 mid-April low remains intact. However yesterday’s late corrective move has left another negative looking candle and the early losses today are putting pressure on the uptrend. This means a test of Friday’s low at $48.70 is underway. Once more whilst momentum remains strong, the RSI seems unable to gain traction above 70 and this has acted as a drag on the upside potential as the RSI has tended to struggle to push on around 70. The way is still open for $50.90 but there is still the prospect of a near term correction within the larger uptrend channel is growing. A closing breach of $48.70 would open the key support which is increasingly strong around $46.75. For now though corrections continue to be seen as a chance to buy.