Is the dollar bull run showing signs of fatigue?

Market Overview

The dollar has been incredibly strong since Donald Trump’s victory in the US Presidential election, supported by sharply rising Treasury yields. However, the huge dollar bull run is just beginning to show a few signs of fatigue in the early moves today. Treasury yields ae lower on the day (with the 2s/10s spread also dipping slightly) and there are a few signs of a dollar correction potentially too. This could still just be a near term pause for breath, however there could also be some room for technical rallies on some of the major currencies prices against the dollar, whilst gold and oil are also showing signs of near term support. After a dearth of economic data in the days following the election, we finally start to get some more focus back on the tier one data today, with US Retail Sales in focus. With UK inflation and the German ZEW also on the economic calendar this could give traders a different perspective.

dollar take profit?

This comes as the equity markets also begin to look a bit more circumspect after several days of gains. The S&P on Wall Street again closed marginally lower (-0.01% at 2164) as Asian markets also consolidated (Nikkei -0.1% despite the sharp yen weakness). European indies are mixed around the open. In forex, the dollar is trading weaker against all the major currencies, with the euro and the yen on the outperforming end of the scale. After several days of weakness the gold and silver prices have shown signs of support today, whilst oil is also higher, all of which would also be supported by a potentially weaker dollar.

There is more of an interesting economic calendar to distract traders from the Trump trades today. The UK CPI inflation is at 0930GMT with a mild tick higher to 1.1% on the headline year on year (last +1.0%) with the core staying at +1.5%. German ZEW Economic Sentiment is at 1000GMT which is expected to pick up slightly to +7.9 (from +6.2). The main event of the day is US Retail Sales at 1330GMT which is expected to be +0.4% for the month which would see the year on year data improving to it best level around 2.9% since November 2014. There is also the Empire State Manufacturing index at 1330GMT which is expected to improve to -1.5 (from -6.8) but still remain negative.

 

Chart of the Day – EUR/JPY

Can euro/yen breakout of the medium term trading range? The pair has found rallies being limited in the past few months as the market has formed a sideways range between 112.00/116.35. However, the momentum has been increasingly positively in the past few days in the wake of the Trump victory and pressure is mounting on the overhead ceiling. The RSI is consistently around 60, whilst the Stochastics are holding on to positive configuration. The short to medium term moving averages have also all converged to turn up in bullish sequence and are supportive around 114.50. On Thursday and Friday last week the market breached 116.35 only to be re-buffed into the close. However the hourly momentum is taking a far more positive configuration and a series of higher lows are forming at 115.27 and 114.93 above the mid-range pivot at 114.00. A closing breakout above 116.35 yesterday now ideally needs to be followed by a close above 117.10, which would confirm the move. This would open the July high at 118.45 which would be the real test and a prospective long term base pattern. Corrections are increasingly seen as a chance to buy.

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EUR/USD

By just three ticks on the Reuters charts, the euro made a new 2016 low yesterday as it plummeted to $1.0706. However it is interesting that the market felt cautious to continue the move lower. Having already turned almost 600 pips lower in four sessions since the spike high at $1.1300 last Wednesday, the euro has slammed through support after support. However one more we now find the RSI hitting 30 which is an extremely rare level for the pair and again is looking extreme. The support has in effect held at $1.0709 and the market stabilised to lift marginally early in today’s session. I am not sure that the low has been seen yet though and I feel that there could just be some room for a minor technical rally. There is significant overhead supply that is prime resistance between $1.0800/$1.0850 which could easily be seen as housing the next batch of sellers. The hourly hart reflects this minor unwinding and as yet there is nothing to suggest this rally will be of any substance. A decisive breach of $1.0709 opens $1.0538.

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GBP/USD

The dollar strength finally managed to make some inroads into correcting the Cable rally yesterday, however there is still a suggestion that this is a correction within a bull recovery that is still on track. The key support remains $1.2330 and there continues to be a series of higher lows and higher highs. However after the corrective candle yesterday, the bulls need to get back on track today. The momentum indicators remain positively configured but are at a point at which they could quickly turn, so the bulls have little room to be complacent here. This is also reflected on the hourly chart which has formed an uptrend over the past two weeks. However the hourly RSI needs to hold above 30 and the support around $1.2450 needs to also hold. A breach of $1.2375 support would suggest the bulls have lost control of the recovery near term. It is also very interesting that the old resistance at $1.2557 once more came back in yesterday and is now protecting a retest of the high at $1.2673. It could be a pivotal day for Cable. Watch also for UK inflation and US Retail Sales to impact.

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USD/JPY

A hugely strong bull candle smashed through the resistance at 107.47 and is a significant moment as this has completed an almost six month base pattern on Dollar/Yen which implies around 750 pips of further recovery in the longer term rally. However, this immediate breakout comes with an air of caution near term. This is a very strong base pattern but the dollar is looking stretched at this point. The RSI closed at 74 yesterday on the daily chart which is the highest level since June 2015 and this comes after a huge bull run for the dollar. However the immediate upside potential looks to be a little limited and this could induce a mild corrective move to help renew upside potential in the recovery. The daily chart shows an excellent band of support 105.50/107.47 between two old key resistance levels which will now be seen as a great basis of support and buy-zone for the next leg higher. The hourly chart is still positively configured but there are a few levels to watch for a tired run to maybe look for a correction. The hourly RSI below 40/45 and the hourly MACD lines below neutral would be a signal. The initial support is with the breakout at 107.47 with subsequent support at 106.95 and 106.00. The bulls will still be looking higher and above 108.55 there is little major resistance until 111.43.

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Gold

Gold is another chart where there are a few signs that the dollar bull run is looking a little tired and there could be room for a technical rally for gold. There has been huge selling pressure in the past few days since Trump’s victory and key support at $1241 has been breached. Another bearish candle yesterday hit a low at $1211, within touching distance of the next key support at $1200. However an early small bull candle is forming today. This comes as the RSI went below 30 yesterday and the Stochastics are beginning to slow (although are still bearish). Is this a technical rally forming? The hourly chart shows a move above yesterday’s high at $1231 would constitute a small base pattern and would imply around $20 of further recovery. However there is considerable overhead supply at $1241 and $1247 with the stale bulls that bought the bottom of the September sell-off. This could limit any technical recovery. I am not sure this is the end of the downside move on gold and I still feel a test of $1200 will be seen. However there could be room for a technical rally first.

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WTI Oil

Is there room for a technical rally on oil too? The intraday breach of the key low at $42.55 could not be sustained and an interesting candle formation has been left as the market rallied into the close. A daily range of 3.8% high to low closed with a positive move on the day and this has been followed by additional upside today. Can this move be sustained? With the dollar showing signs of a corrective move against currencies, there has been an improvement in fortunes for oil. The hourly chart shows a positive reaction on momentum and the bulls will be looking at the resistance and overhead supply at $44.30 as a benchmark to breach on a sustained basis to signal a recovery. Holding above $43.65 support will also add to confidence. The real recovery would be seen on a move above $45.90 which is key near term resistance, otherwise any recovery would still just be a near term blip in the selling pressure.

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