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02/07/2014: Trading outlook ahead of the US session

Once more it has been Sterling that has been the main mover in this morning’s European trading. The big beat in the UK Construction PMI which came in at 62.6 was the highest since February and well ahead of the 59.5 that had been expected. Even though construction only accounts for around 6% of the UK economy this is just another reason to buy sterling as Cable has stormed higher over the past week.

The move has taken GBP/USD to an overbought level not seen (using the RSI momentum indicator) since September 2013. It is very rarely a good trading idea to short into a strong trend such as Cable is currently in, however the upside potential is becoming limited with momentum so stretched and any strong piece of US economic data (ADP or Non-farms) or a hint of a hawkish stance from Janet Yellen could mean a correction setting in.

Traders will be watching for the ADP number which is forecast to be around 200,000 at 13:15BST. Anything firmly above this forecast would be dollar positive and be a drag on Cable. The other feature of the afternoon will be Janet Yellen speaking at 15:00BST although it is unlikely that Yellen will budge from her dovish stance and if she does talk about tightening, she should allude to a rate rise in the middle of 2015 again.

Dollar Index has picked up in the last couple of days as the euro has dipped slightly and Dollar/Yen has improved. These two pairs will be key as to whether this is not just a minor blip in the general dollar weakness of the past few weeks.

DXY   02072014

The euro is now back into the support band $1.3640/$1.3670. This is a key near to medium term support for the bulls. If support can now form around here this would give the bulls hope for an improved outlook. The ADP employment number today could be a driver of direction and if the number disappoints at all a supportive rally could be seen.

The yen has strengthened slightly in the European session and has dragged Dollar/Yen once more back from resistance at 101.60. The recovery may be nascent in its move, but still the dollar bulls have failed to carry on yesterday’s rally. There is still a feeling that selling into the resistance band 101.60/101.80 is the way to play this pair.

Gold is going though another of its small range consolidation days following on from yesterday’s slight correction. If support can build above $1320 then expectations will begin to to be raised. Although the gold price is looking more positive now, I am still loath to confirm the breaking of the primary downtrend and am not 100% confident in the move higher.

European indices have been able to gradually push higher again, with the UK helped by the construction PMI. The FTSE 100 is now within striking distance of the key near term resistance and reaction high at 6841. If the index can push above this key reaction high then the outlook will be confirmed as beginning to improve once again. Could this be that finally the FTSE 100 is beginning to move with Wall Street instead of underperforming? The resistance at 6841 is key near term.   Furthermore, the DAX Xetra is also beginning to post some more positive candlesticks. The 21 day moving average at 9925 has been a basis of support previously and could be an immediate barrier now which needs to be overcome. The DAX now needs to hold a position above 9900 to confirm the outlook is improving again.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.