A big US dollar breakout!
The dollar continues to move from strength to strength. With the US returning from Labor Day public holiday forex traders appear to have taken a view on the dollar. A strong push on the Dollar Index (.DXY) above the September 2013 high at 82.6 now means that there is little real resistance until the July 2013 high at 84.6. This could mean that the dollar has significant upside from here still to come. Looking at forex pairs such as Dollar/Yen, Euro/Dollar and Cable, you could very easily see this is possible.
The end of the Labor Day weekend holiday is meant to signify the US returning from its summer holidays and subsequently there will be a lot of talk in the media about how volumes are supposed to be picking up. Certainly volumes have been better today than yesterday, but it could take a number of days until we see any significant trend developing. Having said that, volumes and for that matter volatility, have been so low through the summer that almost anything would be an improvement.
The sharp dollar strength has significantly impacted on the outlook of many of the major forex pairs. Perhaps the biggest move has come with the breakout on Dollar/Yen. The move above 104.43 has signalled a bull flag which implies a retest of the December multi-year high at 105.44. Momentum is strong and the breakout looks well supported for the further upside.
Cable is another chart which has been significantly impacted. The bull recovery that had been building over several days and successfully achieved yesterday above $1.6600 has been completely destroyed this morning. This seems to have been a real kick in the gut for the bulls, with a series of intraday support being lost, including the recent low at $1.6525. The bears have stamped their authority on GBP/USD today and a retest of the $1.6460 March low looks inevitable now.
The euro has strangely been largely avoided when it comes to where the sellers have been targeting today. However with he Dollar Index bursting through its September high, the equivalent on Euro/Dollar is the September low at $1.3103 which remains intact. There is little suggest though that this support will remain in place for too much longer. Expect further weakness towards the $1.3000 implied target from the big head and shoulders top pattern in due course.
Another big casualty of this dollar strength has been in the gold price. This morning, gold has now breached its support of the reaction low at $1273 and this has opened the initial support at $1258.85. I still do not see this sell-off in gold being clean, and there is a downtrend channel that is now firmly in place. Certainly if the dollar bulls have their way, the chances are we will see a retest of the June low around $1240. Chasing the price lower has tended not to be too successful, more waiting for the rallies to sell.
Interesting moves on the European equity markets today. The FTSE 100 broke above the key reaction high at 6834. This is an important move and breaks a sequence of lower key highs. The concern is that the initial has not been held and there has been a retreat back below the breakout level. However, if FTSE 100 can retake and hold the break into the close this afternoon, it would be seen as a positive move. The DAX is not quite up to its 9600 pivot level resistance and still needs to push above it to improve the outlook (which is still fairly mixed after a choppy week or so).
The S&P 500 is forecast to open around 4 points higher which would take it back to another intraday all time high. US investors continue to look past market risks to back their market gains. Investors now seem to be viewing strong economic data with backing in the stockmarket. The ISM Manufacturing PMI data is due at 15:00BST and is expected to show the outlook for the manufacturing sector as broadly holding its ground at 57.0. Expect the market to react strongly if this forecast is confirmed.