Can dollar strength last following the FOMC “dovish hike”?

Market Overview

The Federal Reserve has raised interest rates by 25 basis points for the first time since 2006. The dollar has strengthened on the FOMC hike, but the move has been seen as a “dovish hike” with Fed Chair Janet Yellen and the statement keen to point out the path of a rate hike would be “gradual” and “not mechanical”. I would question whether this what the dot plots (FOMC members expectations of where interest rates will be in coming years) are telling us? Well, a median rate for the end of 2016 of 1.375% would suggest 4 hikes next year, which is likely to mean there would be one every other meeting (ie. at the meetings with press conferences). To me, this sounds fairly “mechanical”. Also Yellen mentioned the forces of deflation and with China’s move to peg to a basket (and not just the dollar), this could impact on already weak inflation targets, which is likely to mean the Fed is more cautious. This is likely to mean the dot plots are reduced at future meetings and I feel would pare back expectations on the number of hikes the Fed can fit in to next year.

However the market reaction has given the Fed a fairly resounding thumbs up. Equity markets on Wall Street closed strongly higher with the S&P 500 up 1.5%, whilst Treasury yields have pushed strongly higher as well. Whether this move will continue remains to be seen. In the meantime though, Asian markets have had a strong session with the Nikkei up 1.6% and European markets showing strength at the open. In forex markets after some volatility, the dollar has moved to a position of strength again, which slightly flies in the face of the assertion of a dovish hike, and for me this may be a move that will find some retracement in the coming days. The dollar is positive again all the forex majors as the European session gets underway.

Traders will be still digesting the Fed as European announcements are made today. The German Ifo is at 0900GMT and is expected to sit flat around 109.0. The UK Retail Sales are at 0930GMT and are expected to show a small slide back towards 2.3% on the adjusted ex-fuel basis (down from a previous 3.0%). US weekly jobless claims are at 1330GMT and are expected to dip slightly to 275,000 from last week’s 282,000. Also at 1330GMT another regional Fed survey, the Philly Fed index will look to hold above zero again with 1.5 (down from 1.9 last month).

Chart of the Day – EUR/JPY

There is a degree of consolidation that is continuing around the old 133 pivot support band, however this near term recover seen throughout December is beginning to be tested. Not only is the support around 133 being tested on a daily basis, this outlook is being pressured as the 133 pivot band is gradually being squeezed by the downtrend resistance falling at around 134.00. The momentum indicators are reasonably positive for the euro but the RSI is beginning to slide back towards 50 once more. The support of Monday’s low at 132.40 is increasing in importance, and a whole trading day below 133 would be a bearish signal. Yesterday’s reaction high at 133.80 is looking like it could become another lower high under the band of price resistance now between 134.20/134.50. The bulls have got to work hard now to maintain the outlook for this recovery as a loss of the 132.40 support would continue the slide back and back below 132.00 would re-open the lows at 129.60. The bulls will be eyeing a break above 134.60 which would be a falling wedge for an upside target back towards 137.00.

EURJPY   17122015


The euro has come under some pressure again in the wake of the Fed meeting. After having briefly moved above $1.1000 during the press conference, the dollar bulls have taken more control to drag the EUR/USD pair lower. Now the chart is beginning to show some interesting signals. The first point to note is that the $1.0810 key medium term pivot support is coming under threat again. This comes as two consecutive bearish closing candles, followed by early weakness today has got the euro bulls struggling again. Technical momentum indicators are also threatening a correction now, with the Stochastics having completed a bearish cross which could also confirm today. I would be wary of going too short though until this support at $1.0810 has been breached (ideally on a closing basis) as this is such an important level. The intraday hourly chart shows that initial resistance comes in around the $1.0900 area with hourly momentum also now looking increasingly corrective. The euro bulls need a bounce back above $1.0900 today to relieve the pressure.

EURUSD   17122015


Aside from the volatility around the FOMC decision and press conference, the daily chart shows a fairly consistent return of the selling pressure that has characterised the past four months. Lower highs within a downtrend where the rallies of around two weeks get sold into. The momentum indicators also continue to reflect the bearish medium term outlook and selling pressure on Cable. The pair has continued lower again today, down to breach the initial support at $1.4953 and now re-open the key reaction low at $1.4893. The hourly chart shows how the technicals still had a part to play during Yellen’s press conference with the spike higher all but hitting the underside resistance of the neckline of the near term top pattern completed at $1.5105 (the downside target of $1.4980 has now been achieved). The hourly momentum indicators also show a continued corrective outlook with rallies a chance to sell. There is an initial band of resistance around the $1.5000 area.

GBPUSD   17122015


The dollar strength induced from the FOMC decision has continue to improve the chart of USD/JPY, with the technical indicators continuing to turn higher. However it is the move above the resistance at 122.20 which has been the standout development. This has been a key band of overhead supply since the breakdown last week. After an initial look at the resistance in the wake of the press conference, the weakening yen overnight has continued to pull the pair higher. Quite how this band of supply (ie. stale bulls willing to sell) reacts today will be key for the near term outlook. With the 23.6% Fibonacci retracement at 122.34 adding to the resistance, the overnight strength is already waning. A close back below 122.20 would today be a corrective signal. For now the intraday hourly chart shows an unwinding of some overbought momentum, but if the slide continues then there could be a retreat back towards 121.50. That 122.20 level is a key indicator once more today.

USDJPY   17122015


Lots of intraday volatility but little suggestion that the bulls are going to be regaining control yet. That is my takeaway for gold from the FOMC decision and press conference. The intraday rally prior to the decision and subsequent close higher has posted a green positive candle but the move is still within the downtrend channel of the past couple of weeks, whilst the overnight correction back has maintained this move. The daily momentum indicators are not explicitly negative anymore, however, there is still a sense of a medium term negative configuration and that rallies will be sold into. The hourly chart shows another possible lower high has been posted underneath the previous $1079.60, at $1078.20. It will be interesting to see if the bulls can turn this early slide around again to retest these highs, because at the moment it just looks like this is playing out to form, where the mini rallies are again seen just as a chance to sell. Near term support is around $1065 whilst a break of the support at $1059.25 would re-open the low at $1045.85 again.

Gold   17122015


Failing at the first real resistance is never really the best sign for the longevity of a rally, and sure enough the failure around the old key August low at $37.75 is certainly a concern for the bulls. The previous rallies of late October and November have lasted a few days before the sellers returned, but it seems as though the latest rally has petered out after just two days.  The sharp downside move yesterday has really put the bears back in control once more and the configuration of the daily technicals suggests that the bulls have made barely any impact on the chart. Yesterday’s close below Tuesday’s low (around $36.0) has completely switched the outlook and the bears will be once more looking at a test of Monday’s low at $34.55 which is the multi-year low again. The hourly chart shows renewed bearish momentum, so look to now use any rebound back towards 50 on the hourly RSI as a chance to sell. The initial resistance is in the range $36.00 to $36.20, with the rebound high at $37.90 as now being key near term.

WTI   17122015