Dollar rally is stalling as Treasury yields consolidate

Market Overview

The dollar rally seems to be slowing in the past couple of days as the huge move higher in Treasury yields has just started to consolidate. This means that there could be a short period of respite at least, for the selling pressure on major forex currencies and gold. The Trade Weighted Dollar Index closed above 100 for the first time since December last year yesterday but the market is beginning to consolidate. This comes as the 2 year Treasury yield is settling down around 1.0% and the 10 year yield is settling around 2.2%. This settling is allowing support to form on the likes of gold (above $1211) and the euro (above the key support around $1.0710). It is possible that the profit-takers may look to move in if this consolidation continue. However, until there is more meat to the bones of what Trump’s proposals are, it is likely that the market will back this reflation trade that is supportive for the dollar. This comes as FOMC members continue to roll out with more hawkish language in the wake of the prospect of fiscal stimulus from President-elect Trump. Eric Rosengren suggests this would generate a tighter monetary policy with Daniel Tarullo said yesterday that a hike was more likely now.

concerned traders

Equity markets have started to move higher again after a minor bout of consolidation. The S&P 500 has pushed back towards its range highs again with 0.8% gains and a close of 2180. Asian markets were also higher with the Nikkei +1.1%, whilst European indices are also looking solidly positive in early moves. Can the DAX sustain a move above 10,800 this time? In forex there is a mixed outlook for the dollar which is underperforming against support for sterling and the Swiss franc, whilst the Aussie is weaker after a miss on Australian wage growth. Gold and silver have continued to build on yesterday’s support, whilst oil is also holding on to yesterday’s gains.

Traders will be looking at sterling once more this morning with the announcement of UK unemployment at 0930GMT. The headline figure is not expected to move from the 4.9% with a 2,000 increase in claimant count. However the more interesting impact will be seen from the average weekly wages growth which is expected to pick up to +2.4% on an ex-bonus year on year basis. Considering the dip in UK inflation yesterday this will be a key number. The US PPI at 1330GMT is expected to pick up strongly and could be a hint at further inflation increases further down the line, with PPI headline YoY expected to increase to +1.2% (from +0.7%) and the core to +1.5% (from +1.2%). US Industrial Production at 1415GMT is expected to show a +0.2% growth on the month, with capacity utilization expected to improve slightly to 75.5 (from 75.4). The NAHB Housing Market Index at 1500GMT is expected to stick at 63. The EIA oil inventories at 1530GMT have been creating sizeable volatility in recent weeks and the crude stocks are expected to show a build of +1.5m barrels, with distillates giving a drawdown of -2.0m barrels and gasoline stocks a build of 0.5m barrels.

 

Chart of the Day – GBP/AUD

Has the recovery already been nipped in the bud? The near term breakout above 1.6380 formed a small base pattern that implied an upside recovery target of 480 pips towards 1.6860. However it was very interesting to see the recovery this week flounder around the key overhead supply of the old key August low at 1.6715, posting a high at 1.6750. Two subsequent negative candles are a concern, but interestingly yesterday’s low was at 1.6400 and pretty much a pullback to the neckline. Furthermore, this support has been affirmed by a positive reaction early today. However, this now leaves the recovery at a bit of a crossroads for the near to medium term outlook and today’s move could be key. The momentum indicators are mixed with the RSI above 50, the MACD lines having turned back to neutral but the Stochastics are threatening to turn lower again. A drop on the RSI below 50 would be a negative sign, as would a failure of the neckline support at 1.6380. The hourly chart shows a neutral outlook forming on the momentum indicators and the importance of the support at 1.6400. This zone between 1.6400 and 1.6750 could become key now as the market looks for the next signal.

GBPAUD 11112016

EUR/USD

The euro is hanging on to the key support of the January low but the bulls are cutting it very thin at the moment. There is a stern examination of the support at $1.0709 which has been briefly breached on Monday but in effect remains intact as the last two days have held up at this level. Yesterday’s candle is an “inverted hammer” candle which can be a positive signal (with a caveat) at the end of an uptrend, however the next candle needs to be positive. So far, the prospect of support is in the balance with mixe dmoves today. However, the momentum indicators on the daily chart are looking to bottom out now and the RSI is again looking to tick higher above 30 whilst the Stochastics are also looking to turn higher. The hourly chart shows a slowing of the selling pressure with momentum less negative. However yesterday’s high at $1.0815 is now a resistance that needs to be breached before the bulls can become more positive. The support at $1.0709 remains under significant scrutiny and a decisive breach would re-open downside to $1.0538.

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GBP/USD

I see this as a key moment in the development of a recovery for Cable. The bulls have lost a bit of the upside impetus in the past couple of sessions and there would be significant question marks if there were to be a third consecutive bear candle posted now. There is a sequence of higher lows still intact on the daily chart whilst the support at $1.2350 remains intact and this means the support band $1.2330/$1.2350 is key. The momentum indicators are still positively configured with the RSI above 50 and the Stochastics are still positively configured despite the near term turn lower. The hourly chart has taken a more positive turn in the past 18 hours with a pick up from a low at $1.2380 and the hourly momentum indicators having more of an improving configuration now. The resistance from yesterday’s high at $1.2514 will be watched early today but the first main resistance to breach is at $1.2557 and only then would the bulls be taking true coinfidence for a retest of $1.2673.

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USD/JPY

An incredible run higher continues. There might have been the initial signs of a slowing of the breakout yesterday but the bulls have once more burst through to continue the recovery. The break above 107.47 is a key longer term breakout and opens for a further 750 pips of long term upside target. Another strong bull candle continues the upside and there is little serious resistance until the move towards the reaction high at 111.43. The RSI reflects the incredibly strong momentum with the RSI at its highest level since June 2015 and strong configuration on MACD lines and Stochastics. Although the run higher is strong I would still be far more comfortable buying into a correction and I am mindful that such an important breakout at 107.47 is still likely to have a pullback, especially with the RSI so stretched. The hourly hart shows initial support around 108.55 but the main near term support is 107.50/107.75.

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Gold

Whilst the unwinding move is yet to materialise on Dollar/Yen, one safe haven that seems to finally be reacting to the upside is gold. The key low at $1211 has formed as support in the past few days and the market has picked up. The bulls are now fighting to build a near term recovery with the momentum indicators beginning to tick higher. The Stochastics are today crossing higher and the RSI is back above 30. The daily chart shows yesterday’s bull candle unwinding Monday’s decline, whilst the early signs are positive that this rally could continue today. The hourly chart shows that above $1231 completes a minor base pattern and would then see the price return towards the key overhead supply between $1241/$1247. I am still a seller into rallies though as I expect further scrutiny of the key support at $1200 in due course. However, the potential for a near term bounce is growing. It would need a rally back above $1265 to defer the selling pressure.

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WTI Oil

The oil price jumped strongly yesterday amid suggestions that OPEC is launching a bid to revive production cut prospects. This has driven a huge one day rally on WTI with a 5.7% gain. This one candle has driven a change in the near term outlook. I had already been discussing the prospect of a rally forming on the hourly chart, however the daily chart has now taken significant momentum improvement with the RSI pushing to a two week high in a recovery move. This is the strongest one day candle since 10th October and seems to be looking to turn around weeks of selling pressure. The rebound has been so impressive that a break back above the key reaction high at $45.95 has now completed and a close above $45.95 would complete a base pattern which both the RSI and Stochastics are already calling for. The implied recovery target would be $48.30. The move would also be confirmed on a breakout above the old pivot resistance at $46.50. The hourly chart shows the considerable near term improvement and that the pivot at $44.30 is supportive, with $45.43 initially supportive today.

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