Powell steadies expectation of a Fed rate cut, dollar gaining

Market Overview

In the May FOMC meeting, the Federal Reserve moved to calm the prospect that falling inflation could lead to a rate cut this year. Fed chair Powell moved yesterday to do a similar thing with fears that trade tariffs could negatively impact on the US economy and subsequently FOMC monetary policy. Powell believes that it is “premature” to take the view that tariffs will move the Fed approach. Again steering the market away from a prospective Fed rate cut has helped to bolster the dollar once more. It is also interesting to see the path of lower Treasury yields has just begun to turn a corner again, at least in the near term. This renewed dollar strength has been building recently and Powell has added some fuel to this. We can see this playing out across forex today as the dollar gains across the major pairs. We are also seeing a slightly more positive sentiment too, with the news that the US tensions with China improved marginally overnight. The US Government has temporarily eased some restrictions on Huawei. Coming with suggestions yesterday out of China that the yuan would be supported, the USD/CNY rate has started to stabilise under 7.00, a positive sign for market sentiment. This is helping a rebound on equity markets today.

Wall Street closed back again with the S&P 500 -0.7% at 2840, however US futures have rebounded today around +0.3%. Asian markets are closing mixed to higher with the Nikkei -0.1% but the Shanghai Composite +1.1%. European indices are set for a risk positive open with FTSE futures +0.4% whilst DAX futures are outperforming +0.5%. In forex, USD continues to strengthen across the majors, with AUD underperforming amidst the prospect of an RBA rate cut, whilst EUR and GBP are also under pressure. In commodities the stronger dollar is again hitting gold and silver, whilst oil is still finding support from tensions in the Middle East.

It is a quiet European morning on the economic calendar. Into the US session there is Eurozone Consumer Confidence at 1500BST which is expected to improve slightly to -7-7 in May (from -7.9 in April). The US Existing Home Sales at 1500BST for April are expected to increase to 5.35m (from 5.21m in March).

There are a number of Fed speakers to watch out for this week. Today we have the FOMC’s Charles Evans (voter, mild dove) at 1545BST and then FOMC’s Eric Rosengren (voter, leans hawkish) at 1700BST.

 

Chart of the Day – French CAC     

Yesterday’s big negative candlestick opens up a very worrying prospect for the bulls. Is the CAC in the process of building a big medium term top pattern? This is a question that investors are facing across several major markets (see the Dow below), but on the CAC it is a realistic concern. Last week’s rally failed at 5448 which was around a pivot resistance of 5438 which has been in place for the past couple of months. However the rally failing came as the RSI failed at 50 and the MACD lines are threatening to fall over again around neutral. This is a move to watch for the coming days but the focus of support will now be on 5247 initially before the key medium term support of 5212. A breach of the March low would complete a big head and shoulders top opening further correction. The key issue will now be whether the RSI continues to fail around 50, and whether the resistance at 5448 builds further. MACD lines turning lower under neutral is never great, nor is a potential bear cross on Stochastics around 50. The hourly chart shows initial resistance with a pivot at 5400. Yesterday’s low at 5333 is initial support ahead of 5298. Certainly a market to keep an eye on.

EUR/USD

The euro remains under pressure as the dollar continues its run of strength. Breaking back under the old low at $1.1175 this is now a pivot area of resistance. With Monday’s mildly positive candle (adding 15 pips) being cancelled out early this morning, it is clear that intraday rallies remain a chance to sell. The configuration on the hourly chart reflects this well. The RSI failing around 50/60 whilst a bear cross sell signal on MACD lines around neutral show the sellers in control. Expect pressure on $1.1150 to be too much before downside towards $1.1110. A breach of $1.1110 opens $1.1000. Resistance at $1.1185 and $1.1220.

GBP/USD

The selling pressure may have dissipated slightly yesterday, but the outlook for sterling remains pressured. A run of consistent negative closes and downside over the past couple of weeks has significantly shifted the medium term outlook. Breaching a string of support, means that this now turns into overhead supply for selling opportunities. Old key lows at $1.2770/$1.2865 mean there is a band of resistance overhead to capture any near term technical rallies. However, very near term the negative configuration on momentum is stretched (RSI sub 30) and given the stalling of the sell-off, the potential for a bounce is elevated. However, unless there is some serious positive UK domestic political news (highly unlikely) then a bounce would be short lived. Initial support at $1.2700/$1.2710. Expect a lower high under the two week downtrend (currently $1.2900).

USD/JPY

Dollar/Yen is busy building a recovery. The run of higher daily traded lows has now hit five sessions. This leaves yesterday’s low at 109.80 as a near term gauge now. A burgeoning one week uptrend sits at 10.75 adding to support. Furthermore, the market is trading consistently above the previous band of resistance 109.70/110.00. Yesterday’s candle was fairly mixed, but the bulls are looking to respond again today. Momentum continues to improve with the RSI and Stochastics tracking higher, whilst the MACD lines are close to a bull cross. Using intraday weakness as a chance to buy, the way is open for the next resistance at 110.85. Yesterday’s high at 110.30 is initial resistance this morning.

Gold

Although the acceleration lower of the last week may have stalled with yesterday’s doji candle, this could merely be minor respite as the negative pressure on gold has not gone away. There seems to be little appetite to buy gold right now and once again this morning it is trading lower. Bulls may hang on the fact that the market has held up ahead of a test of the key 9 month uptrend which comes in today at $1272. Initial support at $1273 from yesterday’s low is also in place. However, with daily momentum indicators still in decline whilst hourly momentum struggles for any positive traction, a test of $1266 is preferred. Can the bulls now start to build recovery momentum? Watch the hourly RSI moving above 60 and hourly MACD sustaining a move above neutral for the first time in a week. If this is seen then possibly support can build again. However, selling pressure overhead remains an issue. The hourly chart shows overhead resistance between $1284/$1289 now, which until breached will be seen as a near term sell zone. Before that though, the pivot at $1278 is initially needed to be overcome.

WTI Oil

The renewed sense of positive bias is still building in WTI but there is more needed in order to confirm bullish control. The momentum indicators ticking higher again is certainly encouraging, with the RSI and Stochastics rising above their neutral points. Also the MACD lines are closing in on a bull cross around neutral. However the market needs to overcome the 61.8% Fibonacci retracement at $63.60 which has capped the upside in recent sessions. A close above $63.30 (not yet seen) would open a test of $64.80 and the recent April high of $66.60. Closing clear above $63.00 is gradually now seeing the market breakout of its consolidation but the shackles are still on. Support at $60.00 is increasingly bolstered, with $62.50/$63.00 being bought into now.

Dow Jones Industrial Average

Despite the recovery from the key support at 25,210 in the past week, the bulls are still cautious. As with other major equity markets the prospect of a potential multi-month top pattern is still very real. Given the fact that the Dow has fallen back in the past couple of sessions, it would not take too much to see the market back and testing 25,210 again. This is why caution is required still. Despite this, there has been a lack of selling intent in the market. The recovery has just stalled in the past couple of sessions, rather than going into reverse again. Momentum has been looking to improve on a daily basis, whilst holding up well on the hourly chart too. This seems to be a ponderous market for now. Initial support is at yesterday’s low of 25,560 whilst the bulls have a little wriggle room with the support of the near term higher low around 25,340. The barrier to overcome is at 25,950 which has capped the recent rally.