Markets remain cautious ahead of Yellen speech

Market Overview

Ahead of a key speech by Fed chair Janet Yellen, market sentiment seems to be cautious once more today, whilst ECB President Mario backed the ECB’s easing plans and warned against a premature change of tack which could have negative economic consequences. Equity traders are also wary following the cautious close on Wall Street markets yesterday. The dollar had been strengthening in front of a key speech from Janet Yellen which is likely to find the Fed chair talking up the US economy despite the recent economic data disappointments. However the US Treasury yield curve continues to flatten, with the rate sensitive 2 year yields pushing higher whilst the longer end is being held down. The 2s/10s spread now around 78 basis points which is the lowest spread since early September. Concerns over disappointing data persist (weaker than expected core durable goods data was the latest) in being a drag on the longer end of the curve. The dollar  is likely to struggle for traction but will be volatile around Yellen’s speech this afternoon.

Wall Street closed almost flat on the day with the S&P 500 at 2439, whilst Asian markets were mixed (Nikkei +0.4%) on yen weakness. European indices are fluctuating around the flat line too in early moves. In forex, the dollar is giving back some of its gains from yesterday, and although the Kiwi is a mild outperformer, there is little really decisive direction. In commodities, gold is looking to form support above $1240 whilst it is interestng to see the near term recovery in oil holding firm.

Traders will be watching out for US consumer confidence data in addition to a raft of central bankers today. The Bank of England’s financial stability report is at 1030BST and this will be followed at 1100BST with comments from Bank of England Governor Mark Carney which could move sterling. US data comes with the S&P/Case-Shiller House Price Index at 1400BST which is expected to stay at 5.9%. The Conference Board’s Consumer Confidence at 1500BST will be the main focus for data today which is expected to drop back to 116.0 (from 117.9). The Richmond Fed Composite Index is also at 1500BSY and is expected to pick up slightly to +4 (from +1 last month). Finally there are three Fed speakers through the afternoon with Jim Harker at 1615BST, the big one with Fed Chair Janet Yellen at 1800BST and then Neel Kashkari at 2230BST, with references to monetary policy (especially from Yellen) sure to drive Treasury yields and the dollar.

 

Chart of the Day – GBP/JPY

Is sterling close to forming a base pattern against the yen? Sterling has been under pressure in the past few weeks but the move in the wake of the General Election seems to have been something of a near term nadir. A recovery from 138.65 has subsequently broken a five week downtrend and the momentum indicators are now beginning to improve. The Stochastics have been getting stronger for a week now and there has now been a bull cross on the MACD lines. The RSI is around 50 but a move above would be a four week high. The bulls will now be eying last week’s high at 142.55 which has been tested early today. However a move above 142.75 would be key and would now complete a small head and shoulders base pattern. This would signal the confirmed turnaround in the trend and put the bulls on a more shore footing, implying a potential recovery target of around 146.50. The daily candles of the past few sessions have been steadily improving but need to retain this conviction whilst the hourly chart shows the need to hold above 141.30 support. There is an old pivot support around 141 but the big near term support is now 138.80.

EUR/USD

The euro is holding on to its recent recovery within the 200 pip trading band, a recovery that sustains an increasingly neutral near to medium term outlook. The candles are mixed in configuration with a sequence of bull and bear candles that have brought the market back towards the middle of the range. There is a benign and mildly positive bias look to the momentum indicators with the RSI settling just above 50, the MACD lines plateauing above neutral and the Stochastics ticking higher again. This is mild positive bias is also reflected on the momentum indicators of the hourly chart. Initial support is yesterday’s low at $1.1170 whilst resistance is $1.1220 which is now standing in the way of a move back towards the range high at $1.1295.

GBPUSD

The recovery off the recent low at $1.2587 still seems to be a bear market rally and the very neutral, consolidation candle posted yesterday does little to dispel this. Rallies have been sold into for the past five weeks and with the market now finding the old support at $1.2775 now a basis of overhead supply this rally is likely to be seen as another chance to sell. The momentum indicators are negatively configured on a medium term basis and a failure to breach the $1.2775/$1.2817 resistance band will see the corrective pressure mounting once more. The hourly chart shows a mild negative divergence on the hourly RSI and MACD lines which suggests waning upside momentum. The initial support at $1.2703 is initial support and a breach would complete a small top pattern. Subsequent support is $1.2650.

USDJPY

After drifting for several days the dollar bulls were able to resume control of the recovery yesterday with a strong and solid bull candle. The momentum in the push higher subsequently continues to improve with the RSI pushing towards 60, the MACD lines close to rising above neutral and the Stochastics in positive configuration. The strong bull candle also started to break the shackles of the 38.2% Fibonacci retracement at 111.55 and if the resistance band 111.55/112.20 can be breached then the bulls will feel far more confident. The hourly chart shows how the top of this resistance band has been tested early today but as yet remains intact. The near term breakout at 111.70 is now a basis of support initially and reaction round here today could be key to the near term outlook. Another higher low above 111.33 support would sustain the recent upside pressure. A close above 112.20 would open upside towards 113.00.

Gold

Gold is still to recover following the sharp decline from yesterday morning (which was apparently on a significant sell order). However, it is interesting to see that the market failed to decisively breach the $1240 basis of support. An intraday dip to $1236.50 was supported into the close and even early this morning, once more the support around $1240 remains a feature. However the outlook for gold remains under pressure having failed in the recent rally, adding to the resistance around $1261 with the high at $1258.80. Furthermore, the configuration of daily momentum suggests that rallies are a chance to sell. The reaction of the bulls today will therefore be interesting. Will the market find further struggles in recovering? The hourly chart shows resistance initially $1246/$1254, whilst hourly momentum suggests any early rallies are likely to be sold into. A close below $1240 opens the downside.

WTI Oil

After a choppy day of trading a third consecutive bull candle was completed. The move has taken WTI back to the resistance of the downtrend channel again, and although the market initially is breaching the downtrend, the overhead resistance band $43.75/$44.20 remains a barrier to gains. For now, intraday rallies have to be seen as unwinding moves and a chance to sell again. Yesterday’s high at $43.65 could continue to be a lower high. Daily momentum indicators are showing the very early signs of a potential recovery, however there is far more than needs to be seen before any of this is sustainable. Another failed rally would result in a retest of the key support band $42.05/$42.20 around the key November low. The barriers to a recovery remain high for oil and every time a rally threatens the bears still seem to be firm enough to scupper the prospect of a rebound. The hourly chart shows a drop below $42.55 support re-opens the low.

Dow Jones Industrial Average

The bulls seem to have come in once more to support at a higher level and look set to resume the move to test the all-time high at 21,535 again. However, the outlook is not excessively positive as yesterday’s initially positive candle drifted back into the close to post a fourth negative candle in the past five sessions. However, this comes with the daily RSI holding up above 60 and the Stochastics looking to at least stalling their corrective move. Yesterday’s opening gains have now had a gap closed at 21,421 but the bulls still look ready to buy into weakness once more. Friday’s low at 21,334 is building now as the first line of near term support, above the band 21,225/21,261.