The market continues to price for a stronger dollar as expectations of a rate hike in December become increasingly firm. Helped by the flagging prospects of Donald Trump in the race to become President, the dollar strength continues. This has taken the trade weighted dollar index above the 97.57 level it peaked at in July with the dollar now its strongest since March. This comes as Treasury yields continue to rise and the probability of a December rate hike by the FOMC (according to CME Group FedWatch) reaches 70%. The FOMC minutes for the September meeting will be analysed tonight for further signs of the way the committee is positioning for the coming months. Away from the US, sterling has bounced overnight after reports that British Prime Minister Theresa May would be willing to allow Parliament to debate the terms of a Brexit. This is seen as a softening in stance (away from the hard Brexit rhetoric that has been such a driver of the declines in the past week or so). However whether this will make any real difference remains to be seen and it is still likely that any rallies on sterling will be viewed rather sceptically by a market that was burned so severely by last week’s flash crash. Oil is another factor, with the World Energy Congress in Istanbul hosting informal discussions between OPEC members over production cuts.
Wall Street fell into the close last night with the S&P 500 down 1.2% amid a number of factors including concerns over the election, the dollar strength and a drop back in oil. Asian markets were also lower with the Nikkei down 1.0%. European markets are again looking cautious in early moves, however after such huge gains on the back of sterling weakness, a strong rebound in sterling would surely put FTSE 100 under corrective pressure. In forex markets there has been a mixed outlook today, although the strength on sterling is clearly the main mover. The Aussie and Kiwi are also stronger. Gold and silver are marginally higher as their consolidation in the past few days continues, whilst oil has managed to find some support after a dip yesterday.
Traders will be looking initially at the US JOLTS jobs openings with 5.72m expected (5.87m last). However the main event will be the FOMC minutes for the September meeting which will be eyed to see the extent of the divide within the committee over when to raise rates.
Lucky 8 – FX Trader of the Year 2016 competition update
I am now moving on to look at a new set of Lucky 8 instruments for Week 2 of our competition that we are running throughout October. I will be giving daily updates on how the Lucky 8 instruments of the week are performing.
- GBP/USD – The bears remain in control however there has been a minor recovery overnight. This still though looks to be a bear rally and I am looking for a chance to sell again as downside potential is renewed. Resistance is now at $1.2330 but I expect a retest of $1.2086 in due course. (See below for more detail).
- NZD/USD – The bears are in control for a continued correction towards $0.6950 and rallies should be seen as a chance to sell. There is now resistance between $1.7105/$1.7150 and today’s minor recovery does not look to be anything more than a near term bear rally.
- EUR/GBP – Sterling remains very bearish but that does not mean that there will not be chances to sell the currency, so we must be looking to use any dips in EUR/GBP as a chance to buy the pair. The overnight correction to £0.8960 support has now unwound overbought momentum. Support at £0.8900 is key near term but I am looking to use this as a buying opportunity. I expect a retest of £0.9140 in due course.
- EUR/AUD – A failed rally yesterday and early declines today puts the bears in control and the momentum generated is beginning to suggest a test of the support at 1.4532. Look to use a rally maybe towards the 1.4630 breakdown as a chance to sell.
- USD/ZAR – A big breakout above 14.08 has been sustained and the bulls are now in control with the daily chart showing a big bull break, large bull candle and strengthening momentum. If the bulls can hold on to the near term reaction low at 14.14 then a move towards 14.58 could be seen.
- FTSE 100 – Will the failed breakout to a new all-time high yesterday be a big sell signal or a minor near term set-back? The near term supports are key now at 7024 protecting 7000. As the overstretched momentum unwinds the bulls need to hold on otherwise a drop back to 6955 could be seen. It could be determined by the direction of sterling so watch both.
- WTI Oil – The bulls again were unable to breakout above $51.67 yesterday but support at $50.40 along with renewed upside potential on the hourly momentum should help for another attempt. Next resistance beyond $53.50/90. Supports are in at $50.00 and $49.15 is now key. (See below for more detail).
- Cocoa (CCc1) – After such a big sell-off on Monday perhaps it is understandable that there was a minor recovery of sorts yesterday. However, rallies remain a chance to sell and there is resistance at 2708, 2760 and 2800 to use as an opportunity for further weakness.
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An increasingly negative outlook for the euro is developing. I have been looking at the support around $1.1100 as being key and yesterday’s decisive downside break has changed what had been a medium term neutral range play into a bearish euro/strong dollar play. The close below $1.1120 support effectively completed a descending triangle but would be measured as a top pattern with a downside implied target of a minimum medium term 160 pips (i.e. $1.0960) but perhaps as much as 240 pips ($1.0880). This would certainly suggest that the key July low at $1.0950 is now within range. Rallies will now be seen as a chance to sell, with the $1.1120 old support turning into new resistance for any pullback rally. Momentum indicators are increasingly corrective too with downside potential too (RSI around 35). The hourly chart shows a resistance band now $1.1100/$1.1145. The further early weakness today below initial support at $1.1043 means that the downside has now been opened and a close below $1.1050 would confirm the bear control.
The outlook for sterling remains bearish, even though there has been a bear market rally overnight. Yesterday’s sell-off and subsequent rebound has left a low at $1.2086 but I would be surprised if this is the last we see of that level. In any sell-off when the moves become so stretched there is always the potential for a snapback rally and clearly the volatility on sterling remains high as over 200 pips has been added overnight. However the rally is still likely to be short-lived and I would be looking for a chance to sell again. Yesterday’s high at $1.2370 is a basis of resistance but interestingly, also a minor resistance on the hourly chart at $1.2330 is also holding as the price has slipped back again. Although I expect this volatility to continue I also expect further weakness to retest yesterday’s support.
The market is now beginning to consolidate between near term key support (at 102.80) and resistance (at 104.30). The daily chart shows a marginally corrective candle yesterday but the early gains today have unwound those losses and the market outlook is looking to consolidate a touch around the 103.35 pivot. Despite this I continue to expect the bulls to pull higher and pressure the resistance initially at 104.15 and then at 104.30. The 103.15 reaction low from yesterday is also a basis of support near term. The daily momentum indicators remain positively configured and the hourly momentum is also nicely unwound for the next bout of bull pressure.
The bulls just cannot gain any traction in a recovery at the moment. The daily traded high continues to fall now for a seventh consecutive day, with yesterday’s resistance at $1262 the latest. The momentum indicators remain correctively configured and gold is now beginning to find consistent resistance under an old support around $1260. However the optimists would say that the significant selling pressure of last week has dissipated and the bears are now no longer massively selling, However, the hourly chart shows momentum remains negatively configured and I favour a further drift lower back to test the $1241 support. There is resistance building up with $1265 initially and then $1270 and $1277.
The daily chart shows that WTI has failed at the key resistance of $51.67 in both of the last two sessions. However the bulls do not yet look ready to relinquish control and seem ready to fight once more for this breakout. The daily chart shows momentum remains bullish with the RSI above 60, MACD lines rising and Stochastics still strongly configured. Yesterday’s mildly corrective candle has not done much to really change the outlook and there is a feeling that this is a consolidation before another attempt at the resistance. The hourly chart shows that the support has been formed at $50.40 above the breakout of $50.00, whilst the hourly RSI has bounced from above 40, the MACD lines are bottoming at neutral and the Stochastics are rising. All are set up for a renewed bull run. Watch for further news from the discussions of OPEC members on how the production cuts will be handled, as this could drive some volatility today.