Dollar strengthens as Yellen hints at a “live” December FOMC

Market Overview

The potential for a December rate hike by the Federal Reserve was ramped up yesterday after comments from Janet Yellen to House Financial Services committee which strengthened the dollar once more. December is apparently a “live” possibility if the economy continues to move with expectations. Subsequent to that meeting, the ISM Non-manufacturing PMI increased sharply to 59.1 which was way ahead of the 56.5 expected. The reaction was that Treasury yields continued to climb (as they have been in the wake of the October FOMC meeting) with the 2 year yield now back above 0.800% and back to levels where it was when the market thought a September rate hike was on the cards. This is all pushing continued strength on the US dollar which is having a significant impact across dollar plays (clearly on EUR/USD and gold being two prime examples).

Equity markets have been cautious with the move and there seems to be indecision over the past few weeks over what a rate hike would do for sentiment. The slight losses on Wall Street with the S&P 500 losing 0.3% was interesting, Asian markets were also mixed overnight, although the Nikkei 225 was 1.0% higher amid weakness on the yen. In forex markets there has been a fairly settled feel to the Asian session with little real direction being garnered, although with a hint of dollar strength markets are probably still digesting the moves from yesterday. After yesterday’s sharp declines on commodities, gold and oil are also looking to settle today.

After a fairly quiet morning, traders will be looking out for the Bank of England’s “Super Thursday” where the announcement of monetary policy, the meeting minutes and the Quarterly Inflation Report all comes out at 1200GMT. There is no expectation of any change to policy but the number of dissenting voters would increase from the current one (Ian MacCafferty) to possibly include Kristin Forbes and Martin Weale too. Also look out for changes to the BoE’s inflation and growth targets for the coming years. Sterling is usually volatile during this time and during BoE Governor Mark Carney’s press conference at 1245GMT. There is also US Weekly Jobless Claims at 1330GMT which are expected to stay around the came again at 263,000.

Chart of the Day – NZD/USD

The technical deterioration in the Kiwi has continued over the past week and despite a slow burner, the bears are now looking to be in control. The initial test of the support at $0.6615 survived last week, but the pressure has now told and yesterday a second consecutive bearish candle has now resulted in a closing breakdown of the support. This has completed a head and shoulders top pattern which now gives an implied downside target in the next few weeks of $0.6335. The daily momentum indicators have been deteriorating over the past few weeks and this continues  with Stochastics in sharp decline in addition to RSI and MACD lines. Intraday rallies are now to be seen as a chance to sell with the initial resistance being the neckline around $0.6615 and a band of minor overhead supply at $0.6630/$0.6665. The daily chart shows the next support comes in between $0.6450/$0.6500.

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The euro is under increasing pressure after a strong bearish candlestick (which was a 100 pip down day) has broken the key near term support at $1.0894. This now leaves the crucial support of the big medium term range at $1.0810 wide open to be tested. The momentum indicators are increasingly bearish with the MACD lines with the most bearish outlook since March, the Stochastics negative and the RSI showing further downside potential. Look to use any rallies as a chance to sell and the intraday hourly chart shows the initial resistance comes in between $1.0915/$1.0935, with further resistance at $1.0965. The hourly momentum indicators show that as any stretched momentum unwind, with the hourly RSI showing any move towards 40/50 being a decent opportunity to sell. The overnight bounce could be just that opportunity. A successful break below the key floor at $1.0810 would open the next support at $1.0660.

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There is certainly a battle for control being waged and for now the sellers are gradually just beginning to gain the upper hand as the sharp rebound from last week is begins to be retraced. This move is once more meaning that the RSI seems to have failed to break through 60, whilst the Stochastics have rolled over. The other factor is that the downtrend that has been in place for 10 weeks, remains a key feature of the outlook as the medium term outlook becomes corrective within the trading range that dates back to April. The hourly chart shows the pressure is building on the support at $1.5355 and the hourly RSI is also now beginning to fail up at 60 which suggests that near term rallies are being seen as a chance to sell. This outlook is also reflected in the hourly MACD lines now. The resistance in the range $1.5415/$1.5445 is strengthening and any bounce towards there today is a chance to sell. Below $1.5355 opens $1.5300 and then $1.5240.

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A third strong candle in a row now means that the top of the near term resistance band 120.15/121.50 has been breached, however the key resistance at 121.70 has rebuffed the first attack. It is my belief that the breaching of this resistance would be a signal that the market is pricing in a December rate hike by the Fed, so it would appear that this is increasingly close. We see momentum indicators that are improving again with the Stochastics positive and the RSI picking up again. There are still hurdles that need to be surmounted (144 day moving average is still a key basis of resistance and the 61.8% Fibonacci retracement at 121.90 is also still a barrier, but the bulls are really close now to a breakout. A close above 121.70 would be a key move that implies initially 123.00 which would also be the next basis of resistance. The caveat that I have is the series of bearish divergences on the intraday hourly momentum indicators which still show on the RSI and Stochastics (the MACD lines not so much now), which could suggest waning momentum as the resistance is being tested. Questions over the strength of the run higher would be posed if there were to be a decisive move below the 121.50 support band now.

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The gold price once more remains under pressure amid the strengthening dollar. Once again as I wrote my Morning Report yesterday there was a slight pick up but then once again during the day the sellers mounted and the result was a strongly negative candle with a close towards the low of the day. As I write this, once again there has been a slight element of support in the Asian session, but I would not bet against once more the sellers resuming control as the day rolls on. The gold price is now within touching distance of the support at $1104.10. Momentum indicators are clearly negative in the wake of 6 strong bear candles but the RSI is still above 30 and there is further downside potential. Below $1104.10 is the key September low at $1098. The hourly chart shows that the intraday rallies continue to be seen as a chance to sell with resistance from yesterday’s high at $1122.50. The hourly RSI is also a good gauge with the rallies failing around 40/50.

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After all the positivity surrounding the strong breakout above $47.50 that was achieved on Tuesday, the bears have bounced back in a way that has retraced almost all of the move. This now means that today’s trading becomes very important for the near term outlook. The daily momentum indicators look to be turning back lower again which is a concern. The intraday hourly chart though shows that the initial support come in at $46.00/$46.20, but it is the $45.55 support that needs to hold in order to maintain the sequence of higher lows. Watch out for the hourly RSI too and if it starts to move below 30 then the bears will have control and the pressure will be mounting to the downside. The resistance has been left at $48.35.

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