The bounce in equity markets following Friday’s strong Non-farm Payrolls report was short lived as caution and selling pressure has taken control once again this week. You could almost feel the positivity drain out of the markets yesterday as traders look towards the Fed meeting minutes which could give further clues that result in expectations of a rate hike being pulled ever closer. The markets seem to be having a taper tantrum in the past few weeks with a lack of positive newsflow to help lend support. The bulls will hope that this does not last as US earnings season takes attention.
The big story to come out of the last 24 hours has not necessarily been the resumption of the selling pressure, but more that for the first time in weeks there are question marks hanging over the strength of the dollar rally. There have been several signals building up that means that we could be close to a consolidation or even corrective move for the greenback.
Now there may not be much doing yet in the Dollar Index (note the decline in the chart above), but there have been reversal signals that are threatening on Euro/Dollar, Cable and most notably, Dollar/Yen. Furthermore, even the gold price has bounced strongly from its critical low in the past 24 hours. However, more needs to be done.
One swallow does not make a summer, and there would need to be significant further improvement to suggest that the tide was turning against the dollar. In the past few months, any bets against the dollar would have proved extremely costly and there needs to be much more confirmation before I can change my outlook with any conviction.
This afternoon, traders will be looking towards the comments from FOMC members Narayana Kocherlakota and Bill Dudley, both of whom are doves on the committee. Anything that suggests even the slightest a hawkish lean will be pounced upon and the dollar will strengthen once more.
Having said that the consolidation already seen in Dollar/Yen suggests that caution is mounting this week in front of the FOMC meeting minutes on Wednesday. The Bank of Japan did not do much to weaken the yen in its monetary policy statement which showed no change in stance. However, Prime Minister Shinzo Abe also noted yesterday that a weaker yen was hurting Japanese households. Risk appetite has certainly been hampered in the past couple of days and this has benefited the yen. A broken 5 week uptrend, a bearish key one day reversal, a bearish crossover signal on the MACD, and a confirmed negative breakdown on the Stochastics. The signals are mounting on Dollar/Yen. I am more inclined to take it as a consolidation and that caution needs to be taken with running long positions in the near to medium term. The support at 108.00 is now key.
However the rebound in Cable yesterday is already beginning to unwind. GBP/USD needs to use the support at $1.6023 to start building the recovery. The rate is currently around the old resistance of the breakdown at $1.6050 and clearly there is a battle going on for control. A move below $1.6023 would see the bears resume control and retest the recent low at $1.5941. The problem for Cable is that EUR/USD has already broken back below its reaction low from this morning at $1.2604 which suggests the dollar is beginning to regain its poise already. On the traditional strategy of the past few months of selling the euro into strength, it looks like there could now be another lower high being left at $1.2674 which is below the key $1.2700 resistance.
European equity markets have been weak throughout the morning with the outlook for the DAX under the most pressure. In firming up the resistance at 9370, the sequence of lower highs (latest at 9310) the DAX is now certainly a sell into strength as it shapes up for a retest of the next support at 9068 and the potential for a full retracement back to 8903 is increasing. FTSE 100 recently hit a low at 6446 and does not look as weak as the DAX. The FTSE 100 will also look to continue its trend of outperforming the DAX in a falling market. Wall Street futures are calling the S&P 500 around 8 points higher at the open, with the outlook still much better than for European indices. Also don’t forget, Alcoa kicks off earnings season in the US tomorrow.