Dollar rally resumes on positive inflation signals

Market Overview

The dollar seems to be resuming its rally in the wake of the positive US inflation and industrial production data yesterday. Add in the hawkish comments of FOMC members Williams and Lockhart (who are admittedly know to be hawkish and are also non-voters on the FOMC) and this has increased the chances of a June Fed rate hike from 4% yesterday morning to 15% according to CME Group FedWatch. The move has spooked equity markets which unwound the gains of the previous session and once more in this increasingly risk-on/risk-off market the good economic news is bad for the markets. The negative correlation between the dollar and the S&P 500 continues. Treasury yields have pushed higher with the 2 year reacting strongly and even the 10 year mildly higher. This is not set up as being positive for risk today and suggests that the market is readying for a hawkish lean in the FOMC meeting minutes tonight.

Wall Street closed lower with the S&P 500 down 1.0% erasing the previous gains, whilst this negative sentiment filtered into Asian markets which have been mostly weaker today although the Nikkei is +0.1% and seems to be bucking the trend after Japanese GDP strongly beat expectations. European markets are weaker in the early moves. In forex markets we are seeing moderate dollar strength across the major currencies, although the yen is holding its ground in the wake of the better growth numbers (although perhaps could be taken with a caveat of the impact of an extra day in the quarter for the leap year). The Aussie is the biggest underperformer after Australian wage inflation was weaker than expected. Dollar strength is also dragging gold and silver lower today, whilst oil is holding on to its new 6 month highs.

Traders will be looking out for the UK employment data at 0930BST with UK unemployment expected to stay at 5.1% but more importantly the market will be watching the UK earnings growth which is expected to pick up slightly to 2.3% (ex-bonus) from 2.2% last month. This is interesting due to the larger than expected drop in CPI on Tuesday this would signal an improvement in real wages. Eurozone final April inflation is at 1000BST and is expected to confirm the flash reading of -0.2%. The EIA crude oil inventories are at 1530BST with another draw of 3.1m barrels expected (to follow last week’s surprise draw of 3.4m barrels). The FOMC meeting minutes are at 1900BST.


Chart of the Day – EUR/GBP

Is sterling in the process of building renewed strength against the euro? Certainly this argument would form in the coming weeks if the Remain camp builds up momentum in the Brexit vote, and the technical may be starting to shape that way too. The recent rally from the April low at £0.7730 peaked out at £0.7945 a couple of weeks ago and after some consolidation in the past couple of weeks, sterling is beginning to find some traction again. This means that EUR/GBP is beginning to fall back again. The momentum indicators are interesting, with the RSI falling back below 50, but the recent rolling over of the Stochastics (arguably a sell signal) and what looks to be the MACD lines failing around neutral seems to be the medium term technicals deteriorating. A close below £0.7843 is a two week low and signals a near term breakdown which gives a quick downside target of £0.7785, however would really signal pressure building for a retest of £0.7730 again. The major support which needs to be watched in the coming weeks is £0.7690 which would signal a large top pattern. Initial resistance is yesterday’s lower reaction high at £0.7855 and then Monday’s high of £0.7895 whilst the May high at £0.7928 is now key.

EURGBP 18052016


The recent consolidation seems to be once more ready to break to the downside as the dollar has started to strengthen again. The trend for just over two weeks has been that intraday rallies on the euro come under renewed selling pressure and with the momentum indicators all in decline the pressure on support levels continues to give way. The latest reaction low at $1.1280 is under threat today and a breach would again re-open the key April low at $1.1213. I discussed yesterday about the overhead resistance band now in place between the old pivot around $1.1330 and previous support at $1.1255. Consistently in the past couple of days this has resistance band has been the limit to the upside as the hourly chart shows momentum indicators unwinding are being used as a chance to sell, so watch for any move towards 50/60 on the hourly RSI as an opportunity. A breach of $1.1215 opens the long term pivot at $1.1100. Key resistance is up at $1.1445.

EURUSD 18052016


With two positive candles in a row the outlook has become rather mixed once more. However the second of those positive candles showed the bulls losing impetus from the high of the day and this has continued into today’s session with early losses. This has bolstered the resistance up around $1.4530. The interesting feature of the chart is the bull crossover on the Stochastics which is a signal that has been very reliable in recent months. Is this a signal for impending upside? There is much more confirmation that is needed but the support at $1.4330 is becoming increasingly key now. The hourly chart may show the immediate rally having rolled over but the old support around $1.4400 will be interesting now as if this can hold then the outlook could take on a more sustainable improvement. This is an interesting battle for control that is being seen. The FOMC minutes could be a catalyst.

GBPUSD 18052016


The consolidation outlook threatened to break to the upside yesterday on a brief move above 109.50, however the bulls failed to sustain the move and the closing breakout failed to be achieved as the bulls pulled back again.  The old neckline resistance around 109.75 could be a factor here but it is more that the dollar bulls are struggling to find the conviction in a breakout. However, there is a slight bullish bias in this range and the Stochastics are reacting more positively now. The initial gains in today’s session are adding to the slight build in confidence for an upside break however nothing is yet being confirmed. The hourly chart has a slightly positive lean in the momentum now with the hourly RSI tending to bottom around 40 before pushing to 70. There is also a run of marginal higher lows in place now with the overnight low at 108.70 above 108.43 and the key near term support around 108.20. A close above 109.50 would complete a breakout and imply 130 pips of upside.

USDJPY 18052016


The support remains in place around the old resistance at $1260 but the bulls cannot find the traction in a run higher. Monday’s intraday turnaround and now the overnight decline today reflects the conflict currently in the gold market. The support band between $1257.25/$1263.10 is strengthening but has still not managed to convince the bulls quite yet to push higher once more. The momentum indicators have unwound and are at levels where the bulls should be eying an opportunity for the next bull run, but they are being held back. Once more the daily RSI is unable to push above 60 (the level at which the bulls start to find traction). The hourly chart shows the very choppy and truncated moves of the past few days and has a technical configuration more aligned to a range play. The resistance is now at Monday’s high of $1288 which means around $30 of range down to $1257.25. Watch for yesterday’s low at $1269.10 today as a decisive breach would heap pressure back on the lows again.

Gold 18052016


Another day of gains has seen WTI trade again well clear of the breakout band between $46.80/$47.00 and looks to be clearing out the November high at $48.35 today in the continuation towards the full retracement to the key October high at $50.92. Yesterday’s candle was bullish yet without the conviction that has characterised much of the past six sessions (with the slight exception of last Friday). The momentum indicators retain a bullish configuration but perhaps with hints of a slight slowing as the RSI edges ever closer to 70. However even if there is to be a near term correction, the bulls remain in control and any minor dips would be seen as a chance for the next bull run. The intraday hourly chart shows a minor support around $47.53 but there is more considerable support in the band $45.60/$47.00. Hourly RSI has been finding lows above 40 in the past five days and unwinding moves are likely to be pounced upon by the bulls.

WTI 18052016

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