Terrible US retail sales pares dollar gains as weak China inflation hits risk

Market Overview

As the backlog of US data in the wake of the recent US Government shutdown starts to filter through there could be some surprises on the way, and some revisions. The US dollar has been huge in recent days, climbing even in the midst of increasingly positive rhetoric on the US/China trade story. This is in the assessment that US data has been holding up well as other economies (Eurozone and China mainly) have suffered. However, yesterday’s terrible US retail sales numbers for December put a cat amongst the pigeons for the dollar strength trade. There has been a key reaction, yields lower, dollar lower. It depends upon how much the market believes that this massive surprise will be revised away as to how far this slip back on the dollar goes. Initial feeling is that resistance at $1.1300/$1.1350 on EUR/USD should be watched, as should the support at 110.00 on Dollar/Yen. The data has also hit through equities on Wall Street which closed lower last night and look to be lower again today. Add into the mix, another batch of disappointing Chinese data with inflation coming in lower than expected. China CPI fell to +1.7% (+1.9% exp, +1.9% last) whilst China PPI fell to +0.1% (+0.2% exp, +0.9% in December). This adds to a general risk negative look to today’s session, where the yen is the outperformer and the dollar is broadly gaining ground again.

On Wall Street the S&P 500 closed last night -0.3% at 2746 whilst US futures are another -0.4% back early today. This is hitting through Asian markets with the Nikkei -1.1% and Shanghai Composite -1.4%. Furthermore, European markets are also taking a hit early, with FTSE futures and DAX futures both just under half a percent lower. In forex, the move against the dollar has been tempered by the safe haven bias today, with the dollar just clawing back some of yesterday’s slip. In commodities, the risk averse vibe is helping gold to hold on to yesterday’s late rally even in the midst of the dollar rebound today, whilst oil is again creeping higher on continued hope of supply constraint from OPEC.

After the surprisingly weak December retail sales numbers for the US yesterday, eyes will turn to the how the consumer in the UK started the year. A number of UK data points towards increasing concerns over Brexit, so this number will be important today. UK Retail Sales ex-fuel are at 0930GMT and are expected to show a bounce back in January after a weak December, with +0.2% on the month (-0.9% in December) which would see the year on year data improve to +3.0% (from +2.6% in December). More US data comes through today in the wake of the backlog from the Government shutdown, with New York Fed Manufacturing at 1330GMT expected to improve to +7.0 (from +3.9 in December). US Industrial Production for January is at 1415GMT and is expected to improve by +0.1% on the month (after growth of +0.3% in December). The prelim Michigan Sentiment is at 1500GMT and is expected to improve to 93.3 (from 91.2 last month).

Chart of the Day – Silver

There has been a significant deterioration in silver in the past few sessions which threatens to decisively turn the outlook negative again. It could also have negative implications for gold too. For the past ten weeks silver has been trending higher, but a breach of an old long term pivot at $15.60 as a basis of support on Wednesday has now broken this uptrend. The concern increases when looking at the momentum indicators which has the RSI falling below 50, MACD lines in corrective decline and the Stochastics in decline following a “bear kiss”. How the bulls respond to this breakdown will be key in the coming days. A broken uptrend is not necessarily bearish, it could be part of a consolidation, however there needs to be a quick reaction back above this long term pivot at $15.60. There is a minor pivot at $15.43 which if breaks on a closing basis it would open for a test of the key January $15.15 low. The deterioration in the momentum indicators is an added concern but, for now, the momentum moves are still unwinding the positive medium term configuration, and is corrective rather than bearish. There is a run of lower highs in the past two weeks now and resistance in the band $15.60/$15.86 that needs to be overcome to put the bulls in a more positive position once more. Below $15.15 would be a confirmed bear move.

EUR/USD

A negative bias has taken hold of late as the market has been consistently trading under $1.1300. Previously this level has been seen as a floor, but is now becoming a basis of resistance. There is a more corrective configuration on momentum indicators taking hold within the Stochastics settling in bearish configuration and MACD lines sliding lower under neutral. The recent candlesticks have been contradictory but still falling back within a downtrend of the past couple of weeks. It would need a move above $1.1345 (this week’s reaction high) for the bulls to begin real thoughts of recovery again. Within this, there is a risk of a test of $1.1215 which is the key November low. Initial support is at yesterday’s low of $1.1245.

GBP/USD

Sterling does not look happy at the moment. There is a stronger dollar to contend with, but Cable remains under pressure and is consistently seeing selling pressure on any sort of intraday strength. The momentum of this corrective phase over the past few weeks is dragging the market through support after support right now. The latest to be breached could be key too. The $1.2815 old breakout from mid-January was a game changer within the range a month ago and now with this support being breached, threatens to be the same in an opposite way. Losing the support around $1.2815 opens the way towards the medium term range lows. The next basis of support is a 40 pip pivot band between $1.2660/$1.2700. Momentum is increasingly corrective with the RSI the lowest since early December, MACD lines decisively falling and Stochastics in bearish configuration. Any strength is a chance to sell right now. Initially the resistance is with the breakdown this morning at $1.2815 but anything towards $1.2875 is an opportunity now. Initial support at yesterday’s low at $1.2770.

USD/JPY

Finally we saw yesterday  the dollar bulls losing their way a touch, in the wake of the pretty terrible US retail sales data. A solid negative candle has cur over 50 pips off the price. Is this a chance to buy now? Given the strength and conviction of the breakout above 110.00, this old key pivot is an ideal entry point on the basis of support formation. For now the market is slipping back still, but daily momentum indicators are strongly configured still and suggest that weakness is now a buying opportunity. The hourly chart shows the market looking to stabilise as the Europeans take over and a move back above 110.55 would be positive now. The resistance is in at 111.10 now which protects 111.35.

Gold

The bulls just need to get a firm hold of this consolidation intraday moves towards $1316 keep finding a buffer and fail to ignite the buyers. The positive angle is certainly that the market continues to build in the long term pivot band $1300/$1310. The support of the 12 week uptrend comes in at $1301 today and is still an indicator that the bulls will be watching, whilst the market has remained supported above $1302 for over a week now. Despite this though there is a concern that the corrective pressure that has hit silver, could translate to gold. The momentum indicators are again pulling lower and are corrective in nature near term. For now this is still a benign consolidation within the uptrend and the RSI is holding around 60 even if the Stochastics are slipping back. However, the hourly chart is consistently under $1316 whilst hourly momentum indicators are neutrally configured. This suggests that technical indicators are not ready to lead a breakout quite yet and the consolidation continues.

WTI Oil

Brent Crude has decisively broken out to new three month highs and this should be a positive signal for WTI. The positive candles are building again, with three in a row now and the outlook is increasingly pointing towards an upside break above $55.75 resistance in due course. With the run of higher lows in recent sessions, a positive configuration has resumed on momentum indicators and the bulls are now gathering pace. The RSI is rising towards 60, the Stochastics crossing higher again with upside potential and the MACD lines are also stable above neutral. If a breakout above $55.75 can be confirmed with a two day close above it would complete a base pattern (effectively an inverted head and shoulders reversal). The immediate upside target of $5.25 from the one month range breakout meaning that a move to test the next key resistance at $58 would be on. The hourly chart shows that the pivot around $53.00 is growing in importance near term.

Dow Jones Industrial Average

There is still  positive outlook for the Dow over a medium term outlook and given the propensity for corrections to be bought into over recent weeks, there is still a suggestion that weakness is a chance to buy. It is arguable that the momentum of the trend higher is beginning to slow, but for now there is little concrete sign that the buyers have had enough quite yet. Yesterday’s mild slip back cut around 100 ticks (-0.4%) and is likely that it will not be long before the buyers come back in again. There is though the early signs of slowing momentum, with the RSI, MACD and Stochastics all threatening mild negative divergences or crosses. These must be watched. However until a higher low is breached (the latest is at 24,950, there is little real shift in outlook. Yesterday’s low at 25,310 is an initial gauge of sentiment today.