Powell speech eyed as ever more dovish major central bank policies are mooted

Market Overview

Major markets are stuck in a period of consolidation. This is shown across forex majors, commodities and indices. We see Treasury yields drifting and almost daily fluctuations on the US dollar. Equity markets are broadly no higher today than they were a month ago, whilst gold has become increasingly sticky around the $1700 area. However, are we close to the next policy shift from major central banks? Negative interest rates were touted and possibly “whatever it takes” by the Reserve Bank of New Zealand overnight (something that has hit the Kiwi this morning). Whilst the more traditionally hawkish members of the FOMC (Loretta Mester yesterday) continue to talk down the concept of negative rates from the FOMC, yesterday’s weaker than expected Consumer Price Index inflation data from the US open the prospect of increasingly dovish policy. Fed chair Powell has a speech today and all eyes will be on the potential for further dovish moves from the Fed. Negative rates may not be on the agenda yet, but yield curve control is realistic. The US 2 year yield is drifting lower and is only 17 basis points above zero now. The US dollar was hit by the CPI print yesterday and if Powell talks about yield curve control then there would be a dollar hit that could begin to break these consolidations on major markets. Early this morning, we have had UK GDP which has come in higher than expected. March’s decline of -5.8% was higher than the expected -8.0% and leaves the UK’s Prelim Q1 GDP at -2.0% (-2.5% exp). The ONS has said though that the difficulty in compiling the data will leave it open to significant revisions, so perhaps it is best not to get too positive about this. GBP has nodded higher nonetheless.

Wall Street closed strongly lower last night with the S&P 500 -2.0% at 2870. With futures just a shade higher (E-mini S&Ps +0.4%) this leaves a negative skew this morning. Asian markets were mixed to lower (Nikkei -0.4%, Shanghai Composite +0.2%) whilst European markets are under pressure (FTSE futures -1.0%, DAX futures -1.2%). In forex, there is a basis of consolidation on USD, although there is outperformance of GBP after the UK GDP positive surprise, and underperformance of NZD after the dovish outlook from the RBNZ discussing “whatever it takes”. In commodities, there is an ongoing consolidation on gold, whilst silver is slightly higher today. Oil remains stuck ranging, with a shade lower in early moves.

Eurozone Industrial Production is the first real data of note on the economic calendar at 1000BST. Consensus is expecting a -12.1% monthly decline for March, which would drag the year on year data down to -12.4% (after -1.9% in February). Into the US session, the focus will again be on deflationary signals, with US PP (or factory gate inflation) for April at 1330BST. Consensus forecasts expect headline US PPI to decline to 0.2% on the year (after being at +0.7% in March). Core US PPI is expected to slip back to +0.9% (from +1.4% in March). EIA Crude Oil Inventories are at 1530BST and are expected to show yet another build of +4.3m barrels (after +4.6m barrels last week) which would be the 16th consecutive weekly build.

There will also be a key speech by Fed chair Jerome Powell today at 1400BST.

Chart of the Day — EUR/JPY

There has been a significant shift in sentiment out of the yen in recent sessions, which shows throughout the forex crosses. There has been a significant rally seen on Euro/Yen, but is it just another chance to sell? The late April breakdown below 116/117 (which was an historic floor throughout 2019) seemed to be a key outlook changer. Previously this had been the basis of support, but a failure suggested a new more negative outlook was taking hold. Despite a spike rally to 117.75, the bulls have been unable to sustain recoveries and rallies continue to be used as a chance to sell. The latest four session rebound has unwound the market to hit a six week downtrend (today at 116.70) and a bull failure candlestick yesterday leaves the market very much in the sell-zone of the old 116/117 band (now a basis of overhead supply). RSI has unwound towards 50 again, where previous rallies have faltered in the past six weeks. It means that how the market reacts around these resistance levels in the next couple of sessions could be key for whether downside momentum renews to retest 114.40 once more. The rally needs to clear 117.75 resistance to really shift the outlook towards sustainable recovery.

EUR/USD

Once more we have seen the bulls defending the bottom of the trading range. Yesterday’s low at $1.0785 helps to bolster further the support band $1.0725/$1.0765 that has built over the past five weeks. This comes with a continuation of the market also trading under the $1.0890 pivot, which has been a consistent feature of trading throughout the $1.0725/$1.1015 range. This re-confirms again the period of consolidation on EUR/USD, with momentum indicators remaining in their very neutral configurations. The RSI between 40/57 for the past seven weeks reflects this well. Yesterday’s positive candle (although closing -40 pips below the session highs) will give the bulls confidence to have another go at the $1.0890 pivot once more, but with hourly chart signals still broadly ranging for this period, they may need some sort of a catalyst. Perhaps Fed chair Powell’s speech today could be the trigger to break the shackles?

GBP/USD

Cable failing to feel the benefit of a broadly weaker dollar yesterday is a concern for the outlook for sterling. It hints at an underlying weakness beginning to build. The recent failure of Cable around the old $1.2400 mid-point and subsequent close below $1.2300 is a big warning for the bulls that this range may not be as solid as previously thought. How the market reacts to $1.2245/$1.2265 support built over the past few weeks will now be key. The support band has held this morning, helped by the better than expected UK GDP figures, but this needs to continue. A deterioration in momentum has been threatening in recent sessions. There is now a move on RSI to multi- week lows, whilst MACD lines begin to deteriorate and Stochastics are pulling to six week lows into negative configuration. This is certainly worrying times for the bulls. A closing breach of $1.2245 opens $1.2160 which is the key near to medium term support of the range (also being the key April low). The hourly chart shows resistance between $1.2375/$1.2400 and a lower high under here on a rebound will simply increase the pressure on $1.2245/$1.2265 again. Cable bulls will be hoping that a dovish Fed chair Powell might save them from a breakdown of support.

USD/JPY

When Dollar/Yen surged higher on Monday, the potential was that the move could be an outlook changer. However, the concern has been that this was a similar looking move to the early April rally which subsequently faltered after just three strong bull candles and then begun to drift back lower again. There is a risk that a similar set up could now be forming again. A strong three bull candle set up has been followed by a retracement candle. Given the market retraced to the mid-point of Monday’s bull candle (around where it trades this morning), this leaves the market at a key juncture around 107.10. Losing the support of the breakout at 106.90 (an old pivot) would be confirmation that the bulls have not managed to sustain their recovery and it would have been a false move. We discussed yesterday about the bulls needing to lay the foundations for a recovery with a higher low. This needs to now begin to form today. Resistance has been left at 107.75 which needs to be overcome to build the new trend of higher lows and higher highs. Until then it is difficult to trust the validity of a recovery on Dollar/Yen and we favour pressure towards the lows around 106.00 again.

Gold

The range on gold continues as the market remains stuck around $1700. For the past five weeks, gold has traded within the confines of resistance at $1746 and support at $1660. As the range has gone on, there have been converging levels of support and resistance, leaving the most recent levels of $1681 as support and $1722 as resistance. Interestingly this is entirely around the old $1702 old breakout which has become a pivot within the range. Gold is now into its 12th session of having printed trades at this $1702 pivot. Momentum indicators continue to moderate, with the RSI and Stochastics almost entirely flat around their mid-points. MACD lines are still sliding back but this move is simply unwinding the momentum of the April rally and is part of the moderation. We continue to favour buying weakness within the range for eventual tests of the $1738/$1746 resistance. However, for now this is a very slow burner.

Brent Crude Oil

Despite positive newsflow on oil production cuts from Saudi Arabia, we saw the recent consolidation on Brent Crude continue yesterday. For the past five sessions the market has traded in a tight band above $28.65 support, but failing to overcome $32.25 resistance. For now, this is a consolidation that is stable with the support band $27.15/$29.00 broadly intact, a band that the bulls need to hold to sustain the recovery potential. RSI remains above 50, with MACD lines rising but Stochastics just beginning to edge lower serves as a warning for the rally. The technical outlook suggests a pause for breath, for now. However, there is still a concern that this is a very similar looking consolidation to the one that was seen on Brent Crude almost exactly a month ago. A sharp early April rally was followed by a consolidation that took hold around a week before the May WTI contract expiry. The price subsequently broke the consolidation to move sharply lower and massive panic selling in the market ensued. Losing support initially at $28.65 would be certainly be a warning, whilst below $27.15 would be a massive alert of history repeating itself.

Dow Jones Industrial Average

A decisive negative session has once more revived the prospect of a correction. Although the market is not exhibiting any confirmed corrective signals yet, there is a constant shallowing of the recovery trends. This comes as the positive momentum has gradually ebbed away, leaving the Dow effectively rangebound now. There is still a run of higher lows in place, with the latest key at 22,940. However, the market is no higher now than it was exactly a month ago, whilst the RSI has spent that time in an incredibly tight range of 49/58. MACD lines have completely flattened and Stochastics have again just turned back to their 50 neutral point. The momentum in recovery is being lost. The decline back in yesterday’s session leaves resistance at 24,350 as a potential lower high now. More importantly then would be the support of last week’s low at 23,360 as a breach of this level would mean the first formation of a lower high and lower low, which is the early stages of a technical downtrend. Initial support at 23,660.

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