MIXED MARKETS AS TRADERS BEGIN TO LOOK TOWARDS THE FEDERAL RESERVE

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Market Overview

There are some mixed moves on markets with trading sentiment starting to consolidate as traders begin to settle down in preparation for the Federal Reserve meeting on Wednesday. The moves on major markets have become more reticent and lacking conviction, with EUR/USD and gold lacking direction. This comes as the market fully anticipates a rate hike of 25 basis points by the FOMC tomorrow, however will the Fed also take account of deteriorating inflation signals too in its forward guidance? One market that has continued with conviction has been sterling which remains under pressure following the result of the UK election which delivered a hung parliament. Sterling underperformance could now be a feature of ongoing market moves. However the beneficiary of an underperforming sterling has tended to be an outperforming FTSE 100. We have seen this taking hold once more since Friday and this has continued in the early part of this week.

Wall Street closed lower yesterday as the pressure of a corrective tech sector is beginning to weigh on sentiment, especially on the NASDAQ. The S&P 500 was -0.1% at 2429, whilst this does not seem to have translated too badly to Asian markets with the Nikkei flat. European markets are mildly higher in early moves, with the FTSE 100 outperforming. In forex, there is little real direction, although it is interesting to see the commodity currencies starting on the front foot. This comes as the oil price has started to find support in recent days. Reports that Saudi Arabia are doing well in their compliance with the OPEC production cuts have helped to boost sentiment, with the price again around half a percent higher today. Gold is trading around flat.

Inflation will take the focus for traders today. UK CPI is announced at 0930BST with the headline CPI expected to stay at +2.7% (+2.7% last month) whilst the core CPI expected to tick mildly lower to +2.3% (from +2.4% last month). It is also worth watching the UK PPI Input prices reading which is expected to drop back to +13.5% (from +16.5%), as this is a reflection of the unwinding sterling weakness which is starting to unwind. The German ZEW Economic Sentiment is at 1000BST which is expected to improve slightly to +21.6 (from +20.6) which would reflect positively on German growth. US PPI (also known as factory gate inflation) is at 1330BST and is expected to be flat on the month (+0.5% last month).

Chart of the Day – EUR/JPY

For several weeks now the market has been ranging sideways between 122.55/125.80. However recently the support within the band has been coming under increasing scrutiny and now yesterday’s bearish candle closed below 123.30 support for a five week low. The concern has been that the range as been ongoing for several weeks now and the momentum indicators are increasingly corrective with the RSI falling below 50, MACD lines accelerating lower and Stochastics continuing to deteriorate. A confirmation of aa bearish breakdown would be an intraday move below 122.55 with a close below. That would complete a top pattern and imply 230 pips of further correction. The hourly chart shows hourly momentum negatively configured and a move on the hourly RSI below 30 would be a signal that the bearish momentum is gathering pace again. Resistance is growing under 124.03.
eurjpy-13062017

EUR/USD

The euro bulls looked to be regaining control again yesterday however it seems as though the market is still somewhat cautious. The euro weakness in the wake of the ECB and mild dollar rebound after Comey’s testimony had pulled the pair back from $1.1285 and a small top implies $1.1115. However the FOMC is just around the corner and there is a degree of reluctance and caution is growing. The technical indicators are near term corrective with the MACD lines and Stochastics falling, however there is still a sense that this is a correction within the bull run still. With the support of the long term pivot at $1.1100 still firmly intact the outlook remains to buy into weakness. Yesterday’s high at $1.1232 is initial resistance with the hourly chart showing the near term importance of the $1.1160 pivot is growing as support.

eurusd-013062017

GBP/USD

Sterling remains under pressure in the wake of the UK election. The breakdown below $1.2775 was the key move which completed a top pattern and implies around 275 pips of further downside towards $1.2500. Yesterday’s candle just went to strengthen the resistance of the old support, capping around the day high only to sell off sharply through the session again. Rallies are seen as a chance to sell. The momentum indicators are strongly negatively configured now with the RSI at a 13 week low falling below 40, whilst the MACD lines are in decline and the Stochastics have also given a bear cross recently. The hourly chart is strongly bearishly configured and if the support of Friday’s low at $1.2632 is breached it would then open the support of the old reaction highs from February/March around $1.2600. The hourly chart shows resistance building near term around $1.2700 whilst today’s early intraday high is $1.2680.
gbpusd-13062017

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