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06/02/2015: A strong payrolls report could be needed to prevent a dollar correction


Market Overview

Although the charismatic German finance minister Wolfgang Schaeuble has said that he will “agree to disagree” with Yanis Varoufakis over the matter of Greece’s renegotiation of its debt obligations, this uncertainty is being slightly overlooked by the market. The oil price seems to be front and centre once again with regards to driving trading sentiment. A roller coaster of a few days currently has the WTI price back higher again and equity markets have responded positively. Wall Street closed with strong gains, with the S&P 500 up 1%. Asian markets have also followed with the Nikkei gaining 0.8%. European markets are trading slightly lower.

In forex trading there has been a shift back away from the US dollar once more. The international trade deficit for the US widened to larger than expected yesterday and this suggests that perhaps the strength of the dollar is harming US exports. This induced a bit of a dollar correction which has to a certain extent settled down today, with the euro slightly weaker. However, the Aussie and Kiwi dollars continue to claw back some of their recent losses and the yen is also still slightly gaining.

It is Non-farm Payrolls today at 1330GMT and the expectation is for 237,000 jobs to have been added by the US economy in January with the unemployment rate sitting at around 5.6%. The interesting feature may not be in the headline numbers though. Anything between 220,000/250,000 is unlikely to cause much of a stir, however it could be more that the average hourly earnings once more get the focus. Last month the average hourly earnings unexpectedly fell by 0.2% and this caused some dollar profit-taking. The expectation is for +0.3% this time around and with the reading coming in consistently at +0.2 or below this could be a big ask. In addition to the payrolls data there is the UK Trade Balance at 0930GMT and the expectation is for the deficit to widen slightly to -£9.0bn (from -£8.8bn in the previous month).

Chart of the Day – Silver

Silver has entered into a range of consolidation over the past week. The daily chart shows a series of candlesticks with long tails and small bodies which suggest a general level of uncertainty with neither the bulls nor the bears able to gain control. There is a downtrend in place since the failure to breach the resistance of the old crucial floor that had been in place through 2013 and much of 2014 at $18.50 and this remains a key barrier to gains. However interestingly, the consolidation is coming around the neckline of a base pattern around $17.33 and this suggests that it could simply be a pullback to the neckline before further gains. Technical indicators have just unwound a bullish configuration and are still acceptably positive (RSI above 50 and MACD lines above neutral). If silver can continue to hold on to the support around $16.71 and break this recent downtrend, then the bulls can look more positively once more at $18.50 again. A close below $16.71 re-opens the lows at $15.50.

Silver   05022015

EUR/USD

The last few days have come with significant volatility on the euro, however my take is that with the strong reaction yesterday which retraced all of the previous session’s decline the outlook for a technical rally is back on. The daily chart shows all the technical indicators advancing and with the 6 week downtrend broken (and also now being used as a basis of support the bulls are preparing for a test of the bottom of the next resistance which comes in at $1.1540. The intraday chart shows that the rate has just settled down overnight and this is not uncommon being Non-farm Payrolls Friday. This move has seen the positive move on the hourly momentum indicators just roll over slightly and it seems the morning could be characterised by consolidation. I am encouraged by the support formed back around $1.1300 and feel that this could be the basis of a higher low. If payrolls do not shoot the lights out (including strong growth in earnings) then I would expect this euro rally to continue to gather strength to retest $1.1540. I do not see this as being a sustained move higher on the euro, but for now I believe the strong dollar bull run  could be in correction mode.

EURUSD   06022015

GBP/USD

I have been talking about this improvement in sterling over the past few days and now we are beginning to see something tangible. The rally yesterday not only breached the reaction high at $1.5270 but also closed above the resistance too. Sterling is also now in the process of breaking the 7 month downtrend, a move which is also being confirmed on the RSI which has broken out to a 7 month high. The 21 day moving average which has been a consistent basis of resistance throughout the sell-off has also now turned up. As with the euro, the intraday hourly chart shows a consolidation has set in overnight, but I would put this down to Non-farm Payrolls Friday which is often lacking direction in the run up to the announcement. I would now be looking for the support band now between $1.52000/$1.5270 to contain any correction and to form a higher low. I see that Cable is building now for a further rally. The next resistance does not really come in until the old lows around $1.5485.

GBPUSD   06022015

USD/JPY

Dollar/Yen has fallen back into this consolidation mode as the daily chart shows the slight bearish drift continues to be shadowed by the falling 21 day moving average (currently 117.76). Interestingly, the Stochastics are beginning to fall away now even though RSI and MACD are barely moving. The intraday hourly chart shows us a little more and I see the resistance now in place at 118.00. However the pressure to the downside is mounting with a series of lower highs in place and consistent moves towards 117.20 (the old support) and latterly 117.00. I see the hourly momentum as on the weaker side (albeit not drastically). The pressure is building for a serious test of 116.65, but for now there is a fine balance being struck between the bulls and the bears. Perhaps Non-farm Payrolls will be the catalyst for something because the technicals are lacking something.

USDJPY   06022015

Gold

I have an interesting chart which shows the correlation of gold and the dollar has shifted from negative to positive in the past week or so. So with the dollar correcting, the gold price has also too. However, on gold the support is coming in around the 38.2% Fibonacci retracement of the early January bull run (at $1254) and we are now seeing some consolidation. The support in the low to mid $1250s is holding for now and in the past few days it has become possible to almost trade gold as a range play (ie. using classic momentum overbought/oversold signals). However the downtrend since the $1306 22nd January high continues to cap the upside, whilst I also notice that the old support at $1271.85 has now become a pivot level. With the downtrend currently coming in around $1271, the lines of support and resistance are converging and the pressure could be released by the Non-farm Payrolls announcement. Classically I would expect strong payrolls to be dollar positive and gold negative, but as I said earlier, the correlation has switched recently. It will be interesting to see whether the correlation normalises this afternoon.

Gold   06022015

WTI Oil

The price action in the past few days has been utterly incredible. The enormous bull run was retraced with a huge correction which brought WTI back to the 61.8% Fibonacci level of the bull run (c. $47.65), only for the bulls to return once again with gusto yesterday to push the price back 4% higher. That makes calling WTI on a day to day basis incredibly difficult. Key levels from the previous session are currently being completely ignored. We are now back into a bull phase but aside from talking about the key levels it is difficult to make any reliable call currently. The daily chart shows support coming in at the 21 day moving average (which is now turning up at $47.65). The bulls are also hanging on to the improved RSI outlook. This would suggest that the bulls are not ready to roll over and a retest of $54.24 could be seen now.  The intraday hourly chart also seems to show there has been an element of intraday consolidation around the Fibonacci retracement levels. Retracing the bull run from $43.58 to $54.24 we have 23.6% is at $51.75, 38.2% is at $50.15 and 50% comes in at $48.90.

WTI   06022015


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