Crude oil prices remain in a fairly consolidative state. A bearish Evening Star candlestick pattern formed last week, offering a preliminary reversal signal. However, downside follow-through has been noticeably absent, undermining the Evening Star. Immediate resistance appears to be the 113.72 – 116.61 zone that was established in late March.
Recent consolidation does mean that WTI is inching closer towards the key rising trendline from the beginning of December. The latter has been maintaining the broader upside focus, with tests occurring in April and earlier this month. From here, the trendline is also closely aligned 103.83.
Clearing downward would expose the 92.95 – 95.11 support zone, but not necessarily shift the broader horizon bearish. Falling to that zone would mean a more neutral setting, a pivot from the mostly upward stance since the end of last year. Falling under could be that bearish shift, exposing the 85.38 inflection point. Otherwise, clearing resistance places the focus on the 124.76 – 129.41 zone above.
Trade accordingly with your risk
The Nasdaq led Wall Street higher as it put aside Fed Chair Jerome Powell pumping up the hawkish mantra and focused on positive data to finish the cash session with solid gains.
The Nasdaq ended with a 2.76% rally, although futures are pointing to a soft start to the upcoming day session. There are a series of descending trend lines above and below the price which may suggest a bear market is unfolding. The snap move below 12700 went through a previous low and one of the descending trend lines. That might now be an area of resistance just above 12700 as there is a topside descending trend line near there. Support could be at the recent low of 11689 or the at the low trend line, currently at 11200.
Trade accordingly with your risk
The recent sell-off in EUR/GBP may be coming to an end as ECB governing council members continue to opine that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. The ECB’s deposit rate of -0.5% is set to return to positive territory this year with the outline of a series of 25 basis point rate hikes expected to be tabled at the June 9 meeting and started at the July 21 meeting. Current market pricing is for around 90 basis points of tightening this year, implying that four 25 basis point rate hikes may be on the cards this year. The ECB, along with a range of other major central banks, is battling with an unwelcome double of sky-high inflation – 7.5% in April according to a flash estimate from Eurostat – and faltering growth. The European Commission recently downgraded European growth to 2.7% in 2022 from a prior expectation of 4%.
The Bank of England (BoE) is also expected to continue hiking rates. The UK central bank has already raised the Bank Rate by a total of 90 basis points to 1%, the highest level in 13 years, to try and dampen runaway price pressures. While the market expects a further 115 basis points of rate increases this year, UK growth is expected to slow sharply in 2023, leaving the BoE battling rampant inflation and weakening growth. The projected 1%+ of rate hikes over the rest of 2022 may not play out if growth continues to erode.
Looking at the shorter term, EUR/GBP has turned sharply lower since the May 12 multi-month high of 0.8621. The pair currently trades just above 0.8400 and near a cluster of prior support between 0.8384 and 0.8365. The daily chart remains positive with a series of higher highs and higher lows from early March still in place
If EUR/GBP can keep support at 0.83665 in the short-term, then the pair may well push back and eventually look to post a new higher high on a longer term outlook.
U.S. stocks had another ugly day on Thursday, amid risk-off mood and capitulation on Wall Street. After moving between small gains and losses in morning trading, the tug of war resolved to the downside, with all three major equity averages registering their weakest close for the year.
When it was all said and done, the S&P 500 declined 0.13% to 3,930, recovering from a 1.8% drop that had the index flirting with bear market, a period of prolonged declines in which an asset has fallen 20% or more from a recent high. Although a bear market does not in itself predict future returns, it can certainly increase investor pessimism and further reduce risk appetite, especially if the condition afflicts the world’s most important benchmark.
As for the catalysts, the drivers remain the same: stagflation and Fed jitters. Traders are increasingly convinced that the inflationary environment will require a more forceful policy response, which may lead to a recession, a dreadful scenario for the U.S. consumer and, of course, for corporate earnings. Whether the excessive pessimism is justified is irrelevant, what matters now is that traders are convinced that trouble is coming and are acting on that belief by buying downside protection and shying away from stocks.
With no relevant U.S. economic data or key Fedspeak for the next couple of days, sentiment will remain fragile, preventing any meaningful rebound in risk-assets.
For the 20% decline condition to be met, the index will need to break below the 3,855 area. By looking at the daily chart below, we can see why this is problematic: just around those levels, we have a key technical support corresponding to the March 25, 2020 swing low. If this floor were to be taken out, sellers could accelerate the move lower, with the next notable barrier at 3,800, followed by 3,725.
On the flip side, if dip buyers return to take advantage of the oversold condition and spark a bullish reversal, the first resistance to take into consideration comes in at 3,980, and 4,060 thereafter.