07/08/2014: Geopolitical tensions continue to drive dollar strength across major pairs

Market Overview

It would appear that even with a few days of respite, geopolitics is never far away from driving these markets. Tensions between Russia and Ukraine seemed to be ratcheting up yesterday with news of 20,000 combat ready Russian troops mounting on the border, whilst the Ukrainians note that they would not accept their presence that might be part of a Russian “peacekeeping” mission. Furthermore, Russia has also now reacted to the economic sanctions by imposing import bans on agricultural products from the US and EU. Despite Wall Street closing slightly higher, these events could continue to dog European markets. Asia was on the positive side of mixed overnight, with the Nikkei 225 rebounding as the yen softened from yesterday’s strength. European markets are trading lower in early exchanges.

In forex trading, the dollar is gaining against all major currencies once again today. There is also a big decline in the Aussie dollar has come after Australian unemployment unexpectedly increased to a 12 year high at 6.4%. The euro has not really been impacted yet after German Industrial Production data disappointed and unexpectedly fell -0.5% Year-on-Year in June.

There will now be a big focus on the Bank of England and the European Central Bank today, both of which announce monetary policy at 12:00BST and 12:25BST respectively. Neither are expected to change policy, but the market will be looking for further updates on the prospect of ECB quantitative easing which should be a topic for questioning Mario Draghi during his press conference at 13:30BST. There is also the weekly jobless claims for the US at 13:30BST which are expected to increase slightly to 304,000.

Chart of the Day – Silver

Both gold and silver have been retreating over the course of the past 3 weeks, but it is silver that has a far cleaner and better defined correction. The downtrend in place since the $21.55 high, has crucially taken silver below the key pivot level at $20.50 which lends resistance now, whilst also showing considerable deterioration in the momentum indicators. Unlike gold (see below), yesterday’s sharp rebound in silver from $19.69 has done little to improve the outlook and simply could serve as another chance to sell within the bear phase over the past month. There is overhead supply now at $20.26, whilst looking on the intraday hourly chart the rally looks to have simply unwound the price back to the resistance of the falling 89 hour moving average which has been a basis of support. With the hourly momentum indicators rolling over again, it looks as though the sellers are ready to regain control. Although $20.50 has acted as a historic pivot level, the key overhead near term resistance comes in at $20.70.

Silver   07082014

EUR/USD

Having broken the three week downtrend after the sharp climb last Friday, the euro has been under pressure again falling to a new 2014 low at $1.3331. However an intraday rebound yesterday was a strong fight-back by the bulls and raises the prospects of another attempt at a rally. This has left what could arguably be called a hammer candlestick pattern (although by no means perfect). Furthermore, the Asian session has hinted at an element of support early today too. The 14 day RSI has been around an extreme level for a couple of weeks now, but the configuration of its movement recently suggests there is the possibility of a small bullish divergence too. These indicators are still in their formative stages and the prospects of a rally are still very nascent. The intraday hourly chart shows a resistance around $1.3400 that needs to be overcome still as the first barrier, before the more significant near term level around $1.3440.

EURUSD   07082014

GBP/USD

Having abated the selling pressure of the last few weeks Cable is now struggling a bit for direction. Yesterday’s outside day candlestick suggested that the bears are ready to resume control, but there has been little extension of this in Asian trading today. The intraday hourly moving averages are flattening off and hourly momentum indicators becoming increasingly neutral as consolidation begins to take over. The broken longer term bullish arguments (trends broken and 89 day ma breached), along with the strength of the selling pressure and bearish configuration of the daily momentum indicators suggests that there is still a downforce on Cable that is ready to drag the rate back to retest the recent $1.6811 low, under which lies $1.6737 and $1.6690 support. The recovery bulls will certainly be looking at $1.6890 as the first hurdle to tackle which would be needed to change the near term outlook.

GBPUSD   07082014

USD/JPY

I spoke in my webinar yesterday about how the RSI continues to suggest that playing the broad four month range is the best way to look at Dollar/Yen, and this continues to be the case. A sharp decline yesterday yet again took the rate back into the middle of the range, whilst resulting in the RSI unwinding back towards neutral (ie. 50). Unfortunately the easiest way to play the range is to engage reversion trades at the extremes, so for now the outlook is difficult to say. Closing back below 102.00 is not a positive signal but the rebound in Asian trading just shows how spikey the rate has become in the past couple of weeks. The intraday hourly chart suggests a band of old support turned new resistance is now between 102.30/102.45 and if this begins to cap the gains on this rebound it might suggest a potential selling opportunity. However, it might be wise to let the rate settle once more and look for opportunities once more around the extremes of the range 101/102.80.

USDJPY   07082014

Gold

Yet again, yesterday’s price action goes to show the impact of a real escalation in the geopolitical tensions surrounding Ukraine can have with almost $20 added to the price in one day. The tensions have the power to cause significant uplift to the gold price amid a flight into safe haven assets, but once the newsflow and events calm down, the technical indicators have tended to suggest that there is a natural drift back towards $1280. All things remaining equal, there is an overhead pivot level around $1310 which may act now as a line in the sand, along with the resistance of the reaction high at $1312.10. The momentum indicators have turned up with yesterday’s move, but they are still in their corrective configurations and could quickly turn lower again. A close above $1312.10 would require a change in outlook, which could even be today if the Ukrainian tensions with Russia continue to escalate. If this is not seen, with the resistance in place, I would favour a retreat lower once again.

Gold   07082014

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