Futures pare gains as improved sentiment tested

Stocks bounce off key technical levels

US futures are lower ahead of the start of the week on Wall Street, with stocks further paring last week’s gains following the post-Christmas bounce.

We’re now seeing a real test of this improved risk appetite, which has been evident over the last few weeks. US stock markets have rebounded back towards levels that were very well supported during the second half of 2018. A break of these levels in mid-December saw the sell-off pick up significant momentum, so it’s natural that we’re seeing some profit taking when approaching them again from below.

If we can break back above these levels – ≈2,600 in the S&P and 24,000 in the Dow – then it would suggest sentiment has indeed improved and this is more than just a brief correction in a broader downturn. The fundamentals certainly look better which could support it – a more “patient” Fed, positive trade talks between the US and China – but this may be too little too late.

Dow 30 Daily Chart

S&P 500 Daily Chart

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Gold remains well supported by weaker USD

These two factors that have contributed to the improvement in sentiment across the markets are also responsible for the slide in the US dollar. The greenback was very well supported throughout the escalation of the trade war and imposition of tariffs as others, most notably China, were seen as standing to lose more economically as a result. With relations improving, the reverse is now true. Add to this a more dovish central bank, which means fewer likely rate hikes, and the dollar is looking vulnerable.

Gold vs US Dollar Index

Source – Thomson Reuters Eikon

This is good news for gold bulls, with a weaker greenback helping to support prices. The improved risk environment may slow the rise but it still continues to look bullish regardless. A break above $1,300 is still a struggle but with pressure mounting once again, it looks more of a case of when rather than if at this stage.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.