An improvement in the US dollar but can it last?

Market Overview

After what had almost become a torrent of bad economic data for the US finally something for the dollar bulls. The improvement in US CPI inflation (the core data picking up to +1.9%) has induced a dollar rally just as it seemed as though it was becoming a lost cause. The question is whether this improvement in the US dollar can last or is just a near term blip within a corrective move. It is probably too early to tell, but I am still of the opinion that one bit of data does not change the concerning trend of weaker US data and I would be using this as an opportunity to start to look for better positions to play the corrective dollar trade. Although there has been a rebound, many charts such as US Treasury yields, gold and Dollar/Yen look increasingly as though this is a counter trend move that will be short lived. The data will continue to drive the dollar with the Fed still “data dependent” and FOMC members unable to provide a coherent message.

Equity markets have been strong again with Wall Street closing positively (S&P 500 up 1.5%) and Asian markets also higher (Nikkei up 1.1%), whilst European markets are also positive in early trading. In forex markets the euro has found some support after yesterday’s weakness and Sterling continues to consolidate. However the commodity currencies are trading slightly weaker. Gold and silver are also slightly weaker.

Traders will be looking out for the final reading of Eurozone HICP at 1000BST with the headline year on year data expected to remain at -0.1% and the core at +0.9%. The US Industrial Production is at 1415BST and is expected to dip by -0.2% for the month and Capacity Utilization is expected to deteriorate to 77.4. The flash reading of Michigan Sentiment at 1500BST is expected to show a slight improvement to 89.0 (from last month’s revised 87.2). The JOLTS jobs openings are expected to just come slightly off the top with 5.63m.

Chart of the Day – EUR/JPY

The strategy for a number of weeks has been to play the range between 133/137 and once more this has rung true as the resistance band at 137 has capped the gains before a reversal signal has been seen. The big bearish engulfing candlestick pattern (bear key one day reversal) has dragged the pair back into the middle of the 133/137 range. However along with the negative implications of the candle, there is also another Stochastics sell signal whilst once more the RSI has turned lower. The hourly chart shows a near term oversold position but the rallies should now be seen as a chance to sell. Early today there has been a rally into the near term resistance band 135.65/136.00 and any failure of a rebound in this area would be a very good opportunity to sell within the range once more with indicators having turned increasingly corrective. I expect a retest of yesterday’s low at 134.75 prior to the likely retreat back towards the range lows again. The 136.75 high from yesterday is now the key near term resistance.

EURJPY   16102015


Although I now increasingly see the medium term outlook for the euro as improving, the corrective candle yesterday has just seen the pair pullback from the test of the key $1.1465 resistance. A failure to complete a second daily close above the resistance has just put the rally on ice for now but I would now see weakness as a chance to buy. The immediate support band around $1.1350/$1.1400 is holding whilst looking at the daily chart the support band around $1.1300 which was the top of a near term range from the end of September is probably the ideal buying area now. The one main caveat to the bullish view is the crossover on the Stochastics and this may hamper the rally, however I still see the euro bulls as being in medium term control and a correction should be short lived. The hourly chart shows that the immediate term momentum has already unwound and that we are now looking for buy signals such as the hourly MACD lines crossing higher. Initial resistance is $1.1420 before $1.1465 and $1.1495.

EURUSD   16102015


The Cable rally has just hit the buffers a bit near term as a “spinning top” candle (a neutral consolidation candle) was posted yesterday. The slight concern for me is that this consolidation is coming as the RSI is once again up at 60. For the bulls to be considered in control the RSI needs to be pushing consistently into the 60s and towards 70. Despite this though the Stochastics which are a more sensitive momentum indicator, are still rising. The intraday hourly chart shows the sideways trading and the importance of $1.5413 as support (this was the reaction low following the US inflation data). A failure of this support would now suggest a deterioration in sentiment and correction into the band $1.5200/$1.5285. The bulls need a decisive move above the $1.5510 near term high which would then help to continue the near term rally within the medium term range and a move back towards the resistance $1.5660. Near term Cable is at a bit of a crossroads.

GBPUSD   16102015


Yesterday we had Dollar/Yen spending much of the day trading below 118.30 which if the price had closed below this key support level then the outlook would have been materially impacted. As it is I am now of the opinion that Dollar/Yen is showing increasingly corrective signs, and the minor rebound we have seen in the past 12 hours should be seen as a chance to sell. There is a bearish bias now to momentum indicators which I believe will be a drag on the pair. The closing price of the past two days in the lower reaches of the band is a sign that there will be further downside pressure. The intraday hourly chart shows a rally has unwound the price back into the resistance band 119.20/119.50 and I am now looking for the next sell signal. I expect there to be a retest of the low at 118.04 in due course. It would need a rally above resistance between 119.80/120.00 to defer the selling pressure. The 38.2% Fib retracement of 125.28/116.46 adds to resistance at 119.83.

USDJPY   16102015


The two day close clear of the old resistance at $1170 has confirmed for me that a change of strategy is needed. I am now turning neutral on gold. I do not want to put some big upside target for a recovery as I think that near term the could be a move that shakes out a few of the bulls. The RSI has hit 70 and turned lower, whilst the Stochastics have also crossed lower. These are two near term warning signs to keep the bulls honest now. The Important technical factor will now be the old resistance at $1170 which becomes the new support. If this minor pullback can now build the next support between $1156 (the old breakout high from late September) and $1170 and also generate the next buy signal then the outlook will turn more positive. The intraday hourly chart shows a series of higher lows over the past couple of weeks and this needs to continue. A move below $1151 would break this sequence. I am going to take gold step by step now as it has a tendency to be rather volatile sometimes. The outlook has certainly improved but that does not mean that it will be shooting higher. Clearly the resistance around $1190 is now key, whilst $1205.50 is the next resistance and if that is cleared it opens the upside.

Gold   16102015


Such is the volatility that continues to play out in WTI, that once more I have to seriously talk about a potential test of the key supports again. Despite the intraday moves still showing the oil price finding some support during the decline yesterday, this week has been a procession of weakness as the lower lows keep on coming. This means that $45.23 which was yesterday’s low needs to be the first point of reference for the bulls to hang on to today. However, the momentum indicators have been under pressure recently. During the formation of the key $43.20 support the RSI never closed below 47 and and the RSI needs to hold on to this level. Furthermore, the Stochastics are still in correction mode. The intraday hourly chart continues to show the negative near term momentum with minor rallies being used as chances to sell. The resistance at $47 is growing, but $48.43 is now key near term.

WTI   16102015