Recent dollar strength questioned after weaker US inflation

Market Overview

The Easter public holidays can often lead to a distorting influence on markets and it will be difficult to ascertain how much importance can be ascribed to the signals until today’s session really gets into the swing. Positioning will be important this week as the Non-farm Payrolls data looms large on Friday. The recent dollar strength of the past week on the back of a flood of hawkish FOMC member views, is also being called into question after a disappointing reading on US inflation as the Personal Consumption Expenditure dropped back to +1.0% (although the core data remained flat at +1.7%). So the dollar bulls are having to defend once more. However nearer term, traders will be looking towards a speech by FOMC chair Janet Yellen today (at 1620GMT) for clues on monetary policy. I would expect her to be very neutral and play it straight as she knows the implications of the alternative.

With reduced volumes, Wall Street was rather quiet in yesterday’s session (S&P 500 +0.1%) and although Asian markets were broadly slightly weaker (Nikkei -0.2%) there are gains early on for the European markets. In forex trading, the US dollar is slightly stronger with marginal gains against sterling and the Japanese yen, whilst the Kiwi is the best performing of the major currencies today. Gold is mixed to slightly weaker whilst with the oil price trading just over 0.5% lower, it will be interesting to see what happens to the positive correlation with equity markets.

The announcements are rather limited for the European countries today, so attention will turn to the US, with the Case-Shiller House Price Index which is expected to pick up slightly to +5.8% at 1400GMT. Then there is the US Conference Board’s Consumer Confidence at 1500GMT which is expected to improve from 92.2 to 94.0.

Chart of the Day – NZD/USD

After six consecutive days of correction the Kiwi finally seems to be getting a foothold once more. This comes as a bullish key one day reversal (or bullish engulfing candlestick) has formed. This is a powerful one day pattern that really changes the sentiment. It also comes as the positively configures momentum indicators have turned up again after a near term corrective phase (RSI turning up from high 40s again, MACD still above neutral and Stochastics Crossing higher again). The support around $0.6670 is now increasingly important as this level has been used as the floor for the past three sessions. The strong reaction today also is helping to allay fears over the lack of credibility due to the reversal being seen over a public holiday for Easter. The intraday hourly chart shows the bulls have built support over the past few days and pushing above near term resistance at $0.6710/$0.6720 shows confidence is developing once more. The daily chart shows the resistance at $06750 which was the old February highs is already being tested as the Europeans take over, whilst the hourly chart shows $0.6775 needs to be overcome and if this can be achieved then the way is open back towards $0.6875.  A closing breakout would add to the conviction today.

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A bullish candle yesterday has stopped the run of six straight bearish trading sessions for the euro, but is it enough to suggest the correction is over? I remain positive on the euro whilst the support band $1.1050/$1.1100 remains intact and the euro has built from a base of support at $1.1142 posted last Thursday. The momentum indicators seem to be looking to bottom out with the slide in the Stochastics and RSI studies both flattening. However, today’s trading will be important to gauge the mood of the market after significantly reduced trading volumes due to the double Easter public holiday hitting many countries. So far the hourly chart shows only a minor slide back having hit a high of $1.1218 yesterday. Once the European session kicks off we will know far more of the sentiment. These supports around $1.1242 will be the vital gauge.

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After a period of dollar strength helped to drag Cable lower again, the outlook has become somewhat mixed once more after yesterday’s candle added over 120 pips for the bulls. The daily momentum indicators do not really know what to make of the recent trading on Cable as it has been all rather messy and there is little real trend that has developed over the past few weeks. Today’s session needs to validate the strong bull candle to at least a certain extent, otherwise the pressure will return back on the key support at $1.4050. The Fibonacci retracements of $1.4051/$1.4514 are still acting as interesting turning points on the hourly chart with 50% at $1.5283 capping yesterday’s high , whilst 76.4% at $1.4160 is supportive now.

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The recovery continues to build as the gains of the past week or so show little sign of slowing. This comes despite the dollar negative candles seen across many forex major pairs yesterday, there is no such sign on Dollar/Yen. This recovery within the 7 week range seems to be paying little respect to the near term resistance levels and remarkably the bulls will now be eying the more important overhead supply resistance levels that begin to come in around 114.00. However the momentum has also built up over the past week and a half, with the RSI now back above 50 and the highest it has been since early February. The hourly chart shows the 55 hour moving average at 113.30 has become a near term basis of support. Furthermore, the pivot at 113.15 has been used for yesterday’s low and this is again the first line of support, with further support around 112.25/112.50. The rally may have gone further than I had anticipated but I still do not expect there to be an upside breakout from this 7 week range, expecting instead there to be another slide back towards the bottom. The resistance band between 114.00/114.87 is considerable overhead supply.

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The breakdown below the support at $1224 confirmed a chance of outlook and this is a move that is yet to be undone. The technical indicators are all negatively configured for further weakness and rallies are increasingly being seen as a chance to sell. Yesterday’s candle suggests a slight recovery is possible and there is a two week downtrend that comes in around $1250, so there is room for another unwinding rebound, but the outlook remains weak on a near to medium term basis. The hourly chart shows the old pivots of the past few weeks are now coming in as overhead resistance with $1224, before $1237 and $1247.50 all seen as barriers to gains. The fact that gold is now posting lower highs and lower lows means that the support in at $1201 and $1190 could once more come back into play. Yesterday’s low at $1208 is the initial support.

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The fact that there has previously not been more than two consecutive bearish candles since the rally began six weeks ago means that the bulls need to tread far more cautiously after the recent run of losses of the past few days. However, the concern grows as the momentum indicators are now showing the signs of losing impetus with the rally. The sensitive Stochastics have now crossed to turn lower to give a bearish signal, whilst the MACD lines are also rolling over. If the RSI falls back below 57 (the point of the mid-March reaction low) and into the mid-50s, then this would begin to be a warning signal to take heed of. With no trading on Friday due to Easter, yesterday’s very neutral candle coming above Thursday’s low at $38.35 now means this is a key low in place. The band of support between $38.50/$39.00 is still relevant and this needs to hold today otherwise the momentum will gather pace for a correction. Initial resistance is yesterday’s high at $40.15 and a move above this would re-open the $40.90/$41.00 resistance area.

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