Mixed outlook for the dollar following Non-farm Payrolls

Market Overview

There was somewhat of a mixed reaction on the dollar since Friday’s Non-farm Payrolls report as traders weigh up the implications for a September FOMC rate hike. A late dollar recovery on Friday is subsequently being unwound this morning. In isolation the report is reasonably middle of the road, if a little disappointing, but in the context off whether this sets up the Fed for a September rate hike, there seems to be little real conviction. Despite the hawkish lean of recent weeks from key FOMC members, there would have needed to be a third consecutive strong report to really convince any doubters. The Fed Funds futures are not pricing in a September rally and the Fed to go against the markets still seems to be an unlikely move for such a historically committee. There has been a choppy dollar in the wake of the report with the recovery into the close on Friday now giving back some of that move again today. The dollar is underperforming all of the forex major in the early exchanges today with the yen regaining the most amount of ground. The US is on Labor Day public holiday today and this could mean some thin markets and possibly some sharp moves, however we will get more of a sense of trading outlook tomorrow after the long weekend has finished.

traders uncertain

The decreased likelihood of a September rate hike has been positive for equities with Wall Street closing higher again (S&P 500 up +0.4%) with Asian markets also gaining (Nikkei +0.5%. European markets are also showing moderate early gains. On forex the underperformance of the dollar is across the board, with the yen the biggest gainer, whilst the commodity currencies Aussie and Kiwi are both stronger after a decent rebound in the China services PMI to 52.1 (from 51.7).

With the US on holiday today (i.e. ISM Non-manufacturing will be tomorrow now), traders will be looking towards the European services PMIs, with the Eurozone services PMI at 0900BST (53.1 exp) and the UK services PMI at 0930BST which is expected to show another sign of shrugging off Brexit with ta fat reading of 50.0 (last 47.4).


Chart of the Day – Silver

Commodities seem to have come out well from the payrolls report from Friday and this seems to be leading to a rally on the precious metals of gold and silver. However, the more volatile silver price has managed to push a much stronger rally than the more defensive gold chart. But can it be sustained? The price closed at a two week high on Friday above $19.12 but also interestingly above the resistance of the previous top pattern at $19.20. This move to a two week high has also coincided with the improvement in momentum indicators, with the Stochastics giving a confirmed near term buy signal, the MACD lines plateauing in their corrective move and the RSI also picking up again. From a medium to longer term perspective the fact that the rising 89 day moving average (currently $18.42) has once again supported a major correction should be seen as a key development. The bulls will now be looking to build above $19.20 to gather momentum in a resumed bull move. Resistance at $19.93 is next up, whilst $20.49 is a key resistance. The hourly chart shows that there is now a band of support $19.00/$19.20 to use for intraday dips with hourly momentum suggesting corrections are now being seen as a chance to buy.

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The medium term mixed outlook on the euro continues and Friday’s candle has done little to change that. The initial rebound moving into Non-farm Payrolls continued after the key data, only to sell off once more into the close. This 100 pip turn around late in the session is itself now being retraced again as the bulls step back in this morning. The momentum indicators on the daily chart are subsequently giving very little decisive direction. The resistance around $1.1233 remains all but intact (Friday’s brief spike to $1.1251 has not decisively broken that as a ceiling, whilst the floor at $1.1120 is also still in play. Looking on the hourly chart there is little else to go on either, with hourly RSI neutrally configured and moving averages also uncertain. So we must wait for the next catalyst or breakout.

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Unlike many other of the forex majors, sterling has come out of the Non-farm Payrolls volatility managing to hang on to its gains and subsequently the chart has continued its improving path. Having broken to a one month high the bulls remain in control and are attempting to push forward. The broken downtrend and momentum indicators at their strongest since Brexit all point towards the improvement. However we still have to take this as a likely range play now over the medium term and subsequently overhead resistance is approaching. The 23.6% Fibonacci retracement of the Brexit sell-off at $1.3320 is initially approaching, whilst the bulls will also be eying $1.3370 the August high. The bulls will need to keep an eye on the hourly chart though as it has the potential for a slight negative divergence taking hold. The support at $1.3250 from Friday’s low needs to be watched as a breach could see te continuation of the range and some near term profit taking. The pivot at $1.3160 remains important too.

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The dollar managed to claw to some gains on the day on Friday despite the slightly disappointing Non-farm Payrolls. However there seems to be a struggle this morning as the sellers are starting to return once more. If this move is confirmed then there could be a decision to make. The dollar rally of the past two weeks is beginning to have some significant questions asked and the momentum indicators are now at levels where the sellers have previously regained control. The Stochastics have crossed lower already, whilst the RSI has tended to struggle around 60 with the major turning points of recent months. The hourly chart shows that there is now a band of near term support that is key between 102.80/103.00 and interestingly the bearish divergence on the hourly momentum indicators that I have discussed previously are taking shape. There looks to be pressure mounting to the downside. The resistance is based between 104.00/104.30 now.

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With the strong gains from Friday, gold has not put together the most positive sequence of two daily candles since July. This improvement in the technicals is showing through on the momentum indicators with the Stochastics having crossed higher again, whilst the bulls are really fighting to achieve a breakout. The hourly chart shows that an old pivot line around $1325 still has not quite been broken yet, although further gains this morning are continuing to put the pressure on. I have spoken previously about the resistance band $1325/$1330 and this needs to be breached for the medium term outlook to begin to gain positive traction once more. However the improvement in the technical outlook shows that the bulls are gradually regaining some initiative now. The support at $1316 in the wake of payrolls needs to be held to continue this improvement. Below $1309 suggests the bulls have lost near/medium term control.

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The bulls will be wondering now if this is the end of the corrective phase and whether to jump back in. The 2% gain on Friday following the dollar weakness means the prospect of a recovery is on. However, much more needs to be seen before confidence can be gained in a recovery. Despite the rebound, the trading session on Friday was still entirely captured by Thursday’s bearish move (i.e. it was an “inside day”) and whilst the momentum indicators have slowed their corrective move, they are still in decline and the sensitive Stochastics are still falling. An early consolidation move today is not helping the bulls to build traction either. The hourly chart shows the near term resistance band $44.50/$45.00 remains intact and this will be seen as a key condition for the sustainability of any rally. Despite this though, support at $43.00 is now in place and the bulls will be looking to build by posting a higher lower. Also hourly momentum indicators need to continue to improve with the RSI pushing above 70 and MACD lines sitting above neutral required. This could be the beginning of a turnaround, but much more needs to be done.  There is initial support at $43.70.

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