MARKETS REMAIN CAUTIOUS AHEAD OF YELLEN SPEECH

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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.
gbpjpy-27062017

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.
eurusd-27062017

GBP/USD

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.

gbpusd-27062017

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