Lack of intent on forex, but risk appetite is limited

Market Overview

Into the final full trading week of the year, the appetite for risk remains muted and the prospects of a Santa Claus rally appear rather bleak. With dark clouds forming over the global growth picture in recent weeks, traders are looking towards safer haven asset plays and away from higher risk. In the past week alone, Chinese data has been alarmingly weak, whilst Eurozone forward looking PMIs also suggest further growth concerns. This weekend, the Bank of International Settlements has warned that the volatility and risk aversion could be a sign of things to come now. There is a mild unwinding rebound early today in the wake of another 2% sell-off on Wall Street on Friday, but fears are growing. Although there is a lack of real intent on forex markets so far today, the winners seem likely to still be the yen and the dollar, whilst sterling will remain pressured on Brexit uncertainties. Treasuries will remain attractive, whilst equities are unlikely to find much traction in a recovery in this environment. Markets are pricing the Federal Reserve meeting on Wednesday will be a marked dovish shift in policy path and given the elevated levels of volatility, this could in effect force the FOMC’s hand. Any hawkish surprise would simply add fuel to the fire of a risk sell-off.

The selling pressure regained momentum through Wall Street on Friday with the S&P 500 -1.9% (to 2600 ) but with futures a shade higher today (currently around +0.3%) there is a mixed look to Asian markets (Nikkei +0.6%, Shanghai Composite flat). European futures are ticking a shade higher in early moves, with FTSE 100 futures and DAX futures both around +0.3% higher, however, bull traction seems unlikely. In forex, there is limited direction early today, with commodities showing similar lack of direction as gold and oil are fluctuating around the flat line.

It is a quiet start to the week on the economic calendar, with the NAHB Housing Market Index at 1500GMT which is expected to remain at 60 (60 in November).

Chart of the Day – EUR/GBP

Sterling remains under pressure and will continue to be so as Brexit politics continue to dog the pound. Subsequently, the correction on EUR/GBP last week looks to be a chance to buy. The move has unwound back to the confluence of support of a four week uptrend and the breakout at £0.8940. Momentum indicators unwound from overbought in the mini correction last week and have now helped to renew upside potential. It seems likely that sterling will continue to underperform and this will be a pull higher on Euro/Sterling for a test of the key high at £0.9100. With Friday’s marginally positive candle helping to bolster the band of support £0.8940/£0.8950 this is now a key level of support to watch for the near term outlook. The hourly chart shows a near term pivot at £0.9010 needs to be breached to open the upside once more.

EUR/USD

There has been a consolidation on EUR/USD over the past month as the dollar strength has been questioned. However, there is still a negative bias which is still leaning the pair towards the next move to be a downside break again. Although the move has not yet been seen, once more the dollar stands on the brink of another bull move that would pull EUR/USD lower. The support around the old pivot at $1.1300 was tested strongly on Friday and although held into the close, the threat is growing as the near term support at $1.1265 was tested. Momentum indicators have been relatively neutral in recent weeks, but are just beginning to edge lower again. A close below $1.1300 would increase the pressure and certainly below $1.1265, whilst the key 18 month support at $1.1215 would then come in. The resistance seems to also be growing around $1.1400 too as rallies are being sold into.

GBP/USD

Rallies are a chance to sell on sterling. This will remain the case whilst the political log-jam continues over Brexit. The barriers to sterling gains are significant. Technically, breaking down below the old August low at $1.2660 was a big breakdown last week and old support becomes new resistance. Subsequently the unwinding technical rally last week consistently found resistance around the old low and has now turn back again to leave resistance growing at $1.2685. Momentum remains negatively configured on a medium term basis, the resistance of a five week downtrend adds to the barrier at $1.2705 today and the falling 21 day moving average at $1.2725 is a basis of resistance for the past month. Friday’s bear candle means that $1.2475 is open for a retest again, with $1.2350 subsequent resistance.

USD/JPY

Whilst other major pairs saw significant moves on Friday, Dollar/Yen was relatively settled throughout the session, losing around 25 pips. The move reflects what seems to be a growing medium term consolidation pattern. The near term recovery has just unwound towards the resistance overhead with the key highs of the past few months all coming between 114.00/114.50. The converging trendlines that have culminated in the holding pattern of the past ten weeks have meant that momentum indicators are increasingly neutrally configured. The latest rally is now starting to struggle amidst more mixed candlesticks, whilst the RSI is rolling over under 60, MACD lines have barely got going, whilst the Stochastics are also beginning to tail off. Initial resistance now at 113.70 under 114.00. Support in the near term band 113.00/113.35.

Gold

A corrective drift has formed over the past week as the bulls have just lost their edge for the breakout. The move above $1236 was a key medium term development, but there is a growing near term corrective move developing now. As the market has dropped back from $1250 the momentum indicators have turned lower, with a near term sell signal on the Stochastics. If this is backed by MACD lines crossing lower and RSI falling back below 50, it would suggest that another near term pullback (similar to the October into November move back) towards the lower trendline support of the uptrend channel (which comes in at $1210 today) could be seen. A close below $1230 could be the trigger for this. Resistance at $1247 initially now.

WTI Oil

The bulls just cannot find the traction to generate momentum in a recovery. Thursday’s positive candle confirmed that the downtrend phase of the past nine weeks had come to an end and helped to bolster the supports between $49.40/$50.50. However, the potential recovery was stopped in its tracks by another failure around the $52.75 initial resistance, along with a negative candle formation on Friday. There is an ongoing improvement in momentum indicators with the RSI gradually advancing along with the MACD and Stochastics. However, whilst the price continues to bump up against a ceiling of resistance in the band $52.75/$54.75, the recovery prospects will be frustrated. However, as the support also remains intact, a phase of consolidation has taken hold.

Dow Jones Industrial Average

The Dow took another concerning lurch lower again on Friday as a decisive negative candle cut another 2% off the price. The result was the lowest close on the Dow since early May as the market once again ratchets up the pressure on the support around 24,000. Since May, the support of a floor around 24,000 has been tested (and survived) on several occasions, but the pressure is mounting. Momentum is negatively configured with downside potential which means a decisive closing breach of 24,000 would open the next key lows around 23,345. Futures are ticking back higher this morning and it will be crucial to see how the bulls react to this floor around 24,000 again. Resistance is mounting overhead but there is a gap open at 24,473to fill and how the bulls react to this could be key to the outlook now.