MILD SETTLING OF MARKET SENTIMENT

AHEAD OF THE FED

Market Overview

Market fear over a Brexit is being seen across the asset classes, and with over a week until the
23  June polling day, there is plenty of time for market jitters to do some real damage. Add in the
rd

fact that there will now be four of the major central banks announcing monetary policy in the
next 16 hours and the volatility for today will certainly be cranked up a notch or two. Although
the German 10 year Bund yield moving into negative territory has been on the cards for a while,
it still reflects the fearful state that markets are increasingly under. However, there has been a
mild recovery in risk appetite in the in the past 12 hours with Treasury yields rebounding
and this is helping to improve sentiment ahead of the Fed. Today’s meeting of the Federal
Reserve will take the focus though and the prospect is just beginning to help curb the recent
selling pressure on markets today. The Fed is not expected to hike rates today after a string of
data disappointments (although yesterday’s Retail Sales were upbeat), however markets will be
pouring over the dot plots (which currently say two hikes are likely in 2016) and any comments
that guide for a possible move in July or September.

Equity markets have been under pressure but there could be some signs of stability. This comes
as Wall Street only closed marginally lower (S&P 500 down 0.2%) whilst Asian markets were
also solid into the close with the Nikkei +0.4%. European markets have also found some support
in the early moves. Forex markets have shows signs of some improved risk appetite with
Dollar/Yen trading mildly higher, sterling rebounding and the commodity currencies also up.
Gold and silver are broadly flat whilst the one main blot on the risk copybook is that oil is down
over a percent again.

Markets will be focusing on the FOMC statement tonight at 1900BST and Janet Yellen’s press

conference at 1930BST, but in front of that there is the UK employment data at 0930BST, with
unemployment expected to stay at 5.1% and average weekly earnings (ex bonus) expected to
stay flat at +2.1%. US Industrial Production is at 1415BST and is expected to show a month on
month decline of -0.2% and Capacity Utilization of 75.2 (last month 75.4). The EIA oil
inventories are at 1530BST and are expected to show another inventory draw of -2.3m barrels.

Chart of the Day – EUR/JPY

The outlook still looks rather terrible as the euro drops to a new low dating back to January 2013
against the yen. The daily technicals are all showing significant downside momentum with the
pair now having fallen for the past six consecutive sessions with a seemingly accelerating sell-
off. There is negative configuration on RSI, MACD lines and Stochastics. Perhaps the one aspect
is that the RSI has historically hit 30 and formed a low on several occasions in the past few
months, so perhaps there is a dead cat bounce becoming due? Could the appearance of mild
bullish divergences on the hourly RSI and MACD lines also point to this too? There has been a
break above a near term pivot area around 119.00/119.20 with today’s moves in the Asian
session have been supportive. However to signal any serious prospect of any recovery there
would need to be a move above the pivot of Monday’s reaction high around 120.30. Yesterday’s
low at 118.47 is supportive but beyond that there is very little real support of any note until
116.45 and then all the way down at 111.

EUR/USD

With the iconic sight of the German 10 year Bund yield yesterday moving into negative territory,
the Euro has come under renewed selling pressure again. The posting of another third strongly
bearish candle has undone all of the previous day’s rebound and has dropped below the support
of the pivot around $1.1215. The technical momentum has turned negative again with the RSI
confirming the decline, whilst the Stochastics are also falling away still. Technically, a second
daily close below $1.1215 would put pressure once more back on the long term pivot support at
$1.1100. However it is the FOMC today and this will ramp up the volatility. The Fed will not
move on rates but the reaction will depend upon how soon Yellen looks to guide for the next rate
hike. There is initial resistance at $1.1230/40 and then $1.1300.
GBP/USD

The daily tick ranges on Cable remain high with another 182 high/low range yesterday as the
market remains volatile ahead of the EU referendum. Sterling is under pressure and the solid
strong bearish candle along with consistently bearish momentum appears to suggest that a test of
the old support of the March/April lows between $1.4000 and $1.4090 will be seen. However,
the intraday volatility is huge and this is a changing story now as Brexit opinion polls are able to
change the outlook for sterling in an instant. The bearish bias shows that the market is fearful of
a vote to leave and with just over a week to go this may now increasingly be priced in. Could
there be a retest of the key February low at $1.3833? Technically there is resistance now initially
around $1.4180/$1.4200 whilst the main overhead supply comes in at $1.4330. With the Fed
announcing tonight as well this will only serve to increase volatility today.
USD/JPY

The pressure continues on the key May low of 105.52, but incredibly, the support has held for a
second day, as the market found a low at 105.60. It is too early to think that this is the support
holding firm and that a recovery is now underway, but it is interesting to see the number of
candles that have on the one hand been bearish in recent days, but also that the closing price has
been frequently well off the day lows and often been above the marabuzu line of the candle (i.e.
above half way). Does this suggest that the bears are not in as firm control as they appear? The
daily momentum remains negatively configured and this may just be a lull in the selling pressure
but it is something to keep in mind. The hourly chart is still showing lower highs and lower lows
and Monday’s near term pivot around 106.55 is the near term resistance and for now rallies
remain a chance to sell. But a move above 106.55 would open 107.25 and this would be more
considered resistance. A move below 105.20 opens 105.20 and then into the support band back
of 2013 between 101/104.
Gold

I have been discussing for the past couple of days as to whether the gold rally is running out of
steam. This question is still being posed as gold has consolidated for the past 36 hours. The
strength of the bull candles on the daily chart reduced with yesterday’s marginal gains, whilst the
RSI is threatening to roll over again around 65 (which is where the April rally fell over).
However it is on the hourly chart where it becomes evident that the momentum is negatively
diverging. Also now look at the rising 55 hour moving average (c. $1281) which has been
supportive of corrections in this rally. Perhaps the consolidation on gold is coming ahead of the
FOMC meeting tonight (gold tends to be highly volatile on the FOMC announcement usually).
Technically I believe that this will remain a range play and I do not expect the key $1303.60
resistance to be breached. With a move above $1288.20 this means that only $1295.70 lies
between here and the key resistance. However the Fed might drive the near term outlook. Initial
support today comes in at $1276 and then $1264, before $1256.80.
WTI Oil

The flight to safety has been a drag on the oil price which has been under pressure now for the
past four sessions. This is the longest run of declines on oil since March. The medium term
uptrend is now coming under pressure as the oil price hits a crossroads. The initial support is at
$47.75 and is being tested today, but the big support that needs to remain intact for the bulls is at
$46.75. Another factor suggesting that oil is threatening to turn increasingly corrective is that the
RSI has dropped below the low 50s which was where the corrections of April and May had
formed support. The declining Stochastics are an increasing concern and there will be fears now
that if these price supports are breached then there could be a similar correction to what was seen
in March which lasted for two weeks and corrected by over 15% before finding support. The
recent correction is currently just over 6%. The hourly chart shows that near term resistance is at
yesterday’s high of $48.70, whilst Monday’s high of $49.30 needs to be breached to resume the
upside momentum.