03/09/2014: US dollar rally takes a pause for breath as markets consolidate in front of key data

Market Overview

Despite a stellar reading on the ISM Manufacturing data, Wall Street was in consolidation mode yesterday. However, the S&P 500 still managed to hold above 2000 after earlier posting yet another intraday all-time high. Asian markets retained a positive slant with the Nikkei are three quarters of a percent higher as the weaker yen continued to bolster equities, whilst a positive reading on the Chinese services PMI which climbed to 54.4 (from 54.2) and was at a 17 month high. European equity markets are showing a reluctance for a sustained break through the key resistance levels (9600 on DAX and 5834 on FTSE 100) and the longer this goes on the more of a concern it could become. Into the fledgling trading day European markets are in consolidation mode once more.

In forex trading is showing a very marginal degree of dollar weakness, with the Yen unwinding some of its recent losses and the Aussie dollar strengthening after the GDP data came in at +0.5% for Q2 which was slightly ahead of +0.4% that had been forecast. It is likely that the closer we get to this crucial ECB meeting tomorrow the more that the euro will consolidate amid the uncertainty over potential QE.

Sterling traders will be watching out for the UK services PMI at 09:30BST which takes on extra significance after Monday’s significant disappointment of the UK manufacturing PMI. The services data is expected to slide slightly to 58.5 (from 59.1). There is also a monetary policy decision from the Bank of Canada at 15:00BST with the expectation that they will stand pat at 1.0% on interest rates.

Chart of the Day – FTSE 100

The importance of this rally on the FTSE 100 is increasing by the day, however, yesterday’s price action will have done little to calm the nerves. An intraday move above the key resistance of the late July reaction high at 6834 could not be sustained and FTSE 100 closed back below the resistance around 6830 that has capped the upside in recent days. Adding to the concern for the bulls is that the RSI is up around 60 once more which is a level at which the recent rally peaks of June/July have faltered. However, the open to today’s trading has taken the FTSE 100 above the resistance once more, whilst the intraday hourly chart still maintains a positive outlook and there is good support that has formed around 6780. A sustained break above 6834 would re-open the key 6895 high once again.

FTSE   03092014

EUR/USD

In isolation, yesterday’s trading was quite muted, with a doji candle showing consolidation. However, when considered in the context of the huge dollar strength that swept through the other major pairs, then the euro performed remarkably well yesterday. The market seems to be unwilling to take a position ahead of the crucial ECB meeting tomorrow which could (and probably will) be an incredibly volatile event for Euro/Dollar. The momentum indicators are all very weak but with the euro having stabilized now it is unlikely that there will be a view taken either way in the run up to tomorrow afternoon with the chart in wait and see mode. Technical indicators suggest further decline as the “trend is your friend”, but for now there is clearly a fear that fundamental factors could trump the technicals and standing aside is probably the wisest strategy at this stage.

EURUSD   03092014

GBP/USD

Any hopes that there might have been a recovery brewing on Cable were completely smashed by a sell-off of 138 pips that was the biggest down day since 3rd February. This has continued the 7 week downtrend that has been dragging the price through a raft of key supports and has this morning now breached also the March low at $1.6460. Furthermore, having now breached this key support the next key low is not until the February support at $1.6250. So, once more we are back into the strategy of looking to buy into any rallies. The immediate focus will be on $1.6525, with both intraday and daily charts having room to unwind a little bit of yesterday’s oversold momentum. Looking longer term Cable seems to be well on the way towards a retreat to the 38.2% Fibonacci retracement of the $1.4812/$1.7191 huge bull run which is around $1.6280.

GBPUSD   03092014

USD/JPY

With the yen storming to an overnight peak at 105.30, just shy of the 105.44 huge December 2013 multi-year high, the bulls have had a good run. However, are we seeing the early signs of some profit-taking? For the first time in four days since the bull run began the rate has just broken a sequence of higher lows and fallen back below 105.00. After such a strong run this sort of corrective move is not to be unexpected, and may just help the bulls regain some upside potential. The initial support now comes with the previous breakout high at 104.43, but there is also plenty of support back towards 103.50. Intraday momentum indicators are using this correction as a chance to unwind a stretched position. Look for the formation of support and the potential for the next buy signal on the hourly chart. I expect that there will be further upside for a serious test of 105.44 in due course.

USDJPY   03092014

Gold

The daily chart of gold shows a downtrend channel that has formed over the past 8 weeks and continues to drag the price lower. Yesterday’s sell-off posted another lower low at $1262.42 and the way is open for a retreat towards the next price support at $1258.85 whilst the bottom of the channel comes in today at $1252.50. Momentum is increasingly weak and suggests further downside potential. The intraday chart shows a minor bout of support has returned overnight and this is helping to unwind some of yesterday’s sharp downside momentum. I continue to see rallies as chances to sell on gold and the initial resistance is now at the old support turned new resistance of the previous lows between $1273/$1275. Beyond that the next resistance is $1280.

Gold   03092014

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