Espresso Morning Call: A cautious start to a huge week

What we are looking for

• USD is looking steady: USD is looking to build support on major forex pairs.
• Indices tip lower: After a strong end to last week, there is an early decline on Monday. US futures are falling decisively by c. -0.7% with European indices also pulling lower.
• Commodities are mixed to lower: The oil price has fallen away and gold is also slightly lower. Silver is a mild outperformer, for now.
• Data traders: EUR may see some early volatility from the Eurozone Sentiment gauges. The Dallas Fed Manufacturing will be watched for USD volatility. 

Overview

Traders come into this week with a sense of caution about what is about to come. It is a week jam-packed with monetary policy announcements from central banks (the Fed and the ECB especially), in addition to key data (Eurozone inflation, PMIs and US Non-farm Payrolls) and a clutch of corporate earnings. So perhaps it is understandable that there is a degree of early profit-taking on equities (after decent gains last week). The USD has been more in consolidation mode in recent sessions and although there are some minor gains on the pro-cyclical majors (AUD and NZD are the underperformers), the EUR is still performing well. It could be a choppy few sessions ahead, but ultimately a consolidation as traders position for Wednesday (the Fed), Thursday (ECB and Bank of England) and Friday (Nonfarm Payrolls). 

Eurozone sentiment gauges for December will be worth watching for on the economic calendar today. Eurozone Economic Sentiment and Industrial Sentiment are both expected to improve slightly, whilst Eurozone Services Sentiment is forecast to have deteriorated slightly. Elsewhere the Dallas Fed Manufacturing will be watched, with a mild improvement forecast for January.

Today’s news

Market sentiment looking more cautious: Higher risk assets are tending to underperform, especially in forex (AUD and NZD are weaker) and equities (NASDAQ futures are underperforming). 

US Treasury yields are slightly higher: Yields have ticked higher in early moves today. Although the moves are fairly slight, for now. 

Asian markets were mixed: There has been little direction in Asian markets as traders returned from the Chinese New Year holidays. 

German flash GDP slightly disappoints: Q4 growth fell slightly by -0.2% QoQ. This missed the consensus expectations of it being flat. YoY GDP was +1.1% (+1.3% exp)

Cryptocurrencies fluctuate: Cryptos are higher than the close on Friday, after gaining strength over the weekend. Although prices are pulling back initially this morning, they are still looking strong near to medium term. Bitcoin is at $23575 with Ethereum at $1622.

Federal Reserve still in its “blackout period”: There will be no Fed speakers until after the meeting on Wednesday 1st February.

Major Economic Data:

• Eurozone Economic Sentiment (at 10:00 GMT) Sentiment is expected to improve slightly in December to 96.4 (from 95.8 in November).
• Eurozone Industrial Sentiment (at 10:00 GMT) Sentiment is forecast to improve marginally in December to -1.2 (from -1.5 in November).
• Eurozone Services Sentiment (at 10:00 GMT) Sentiment is expected to deteriorate in December to 5.9 (from 6.3 in November).
• Dallas Fed Manufacturing (at 15:30 GMT) The index is forecast to improve to -11.0 in January (from -18.8 in December).

Major markets outlook

Forex: USD and JPY are performing well, with pro-cyclical currencies (AUD and NZD) slipping.

• EUR/USD has drifted back from the resistance around 1.0930 in recent days. This is a consolidation in front of the Fed and ECB meetings which is leaving the market cautious. We continue to look to buy into weakness in the uptrend channel. There is good support between 1.0715/1.0765. Momentum remains strongly positive and suggests buying into support. Above resistance at 1.0935 is the psychological 1.1000 level. 

• GBP/USD has been testing the resistance at 1.2445 for a week and a half now but has been unable to break higher. The daily RSI momentum is positively configured but as it rolls over we continue to see near-term weakness as a chance to buy. There is good support between 1.2170/1.2260. The bulls will still be looking for a close above 1.2445 to open 1.2600/1.2660.

• USD/JPY has been consolidating around the three-month downtrend for the past week, but this consolidation is now breaking the downtrend. This looks to be a consolidation in front of the Fed meeting, but technically the outlook remains negative. The falling 21-day moving average (c. 130.51) is still a basis of resistance. Also, the daily RSI remains negatively configured and has failed consistently around 40/45 in recent months. For now, we favour selling into strength for a test of the low at 127.22 but with support building around 129.00 we are cautious of the consolidation. Above 131.10/131.55 opens 133.60/134.75. 

Commodities: Consolidation is increasingly taking hold.

• Gold is increasingly consolidating now as the price has eased back from $1949. Momentum is reflecting this as the RSI is unwinding lower from above 70. The first important higher low is at $1896 which is around the support of the near three-month uptrend and the rising 21-day moving average. We continue to favour buying into near-term weakness but this looks to be consolidating in front of the key risk events later in the week.

• Silver remains stuck and fluctuates within the consolidation rectangle between $23.11/$24.55. For now, there is more of a tendency to be testing the support of the range, but buyers continue to return to sustain the rectangle. The RSI is hovering around 50 to reflect the increasingly neutral outlook. A closing break of the range is needed for direction. Initial resistance is now at $24.30. 

• Brent Crude oil has seen the rally rolling over from $89.00 and the number of negative daily candles is mounting. For now, the recovery remains intact, with the daily RSI above 50 sustaining a positive bias. However, support above $83.65 needs to hold as it is a key higher low and losing it would turn the recovery into a correction again. A move above resistance at $90.00 would be a decisive positive move now. 

Indices: Wall Street rally is pulling back, whilst European indices are hanging on, for now. 

• S&P 500 futures looked to be preparing for a test of the resistance at 4110/4140, however, a pullback from 4109 has seen the move ease off. The reaction to this weakness will now be an important factor as corrections have been a chance to buy since late December. Momentum reflects a positive bias with the daily RSI around 60. However, there is still a risk of correction as this is a position where upside traction has consistently failed in recent months and the market is at risk of a deeper pullback. Initial support is at 4027 above the 3963 reaction low.

• German DAX has lost upside traction over the past two weeks. The market continues to build a consolidation between 14910/15275 and this morning’s pullback is a continuation of this. The RSI momentum is tailing off but given the strong positive configuration, there is still a suggestion that any near-term weakness is a chance to buy. Holding on to the support of the breakouts between 14604/14810 is important. A close above 15275 would drive the next bull run higher towards 15500/15600.

• FTSE 100 continues with a marginal negative drift over the past couple of weeks. Having found resistance at 7884, a lower high formed at 7818 with potentially now also 7790 too. However, this looks to be a drift back towards the support of the old highs between 7635/7695 and is a retracement within the two-and-a-half-month uptrend. The daily RSI is unwinding gradually towards 50 and upside potential is being renewed. We still look to use supported weakness as a chance to buy.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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