16/07/2014: Trading outlook ahead of the US session

The US dollar has remained strong in the wake of Janet Yellen’s testimony to the Senate Banking Committee yesterday. There was nothing explicitly hawkish in her written account, but the market took slight hints that action might need to be taken if there were dramatic improvements in the labor market conditions as the possibility that rates may be hiked sooner than the June 2015 that is currently priced in.

Weakness in the euro and gold were the major instruments to suffer, with the euro still under pressure today (gold has just formed a bit of support). In fact the dollar has remained strong across the board, making gains against all the forex majors today. This comes ahead of Janet Yellen’s second part of her Congressional testimony, this time before the House Financial Services Committee. This is traditionally a similar (if not the same) written testimony but clearly the questions could be different. The impact on markets is likely to be less volatile this afternoon but still Yellen’s comments will be watched for any more hawkish hints. The Dollar Index is now back into the key pivot band between 80.4/80.6 and this could be a key time for the greenback approaching. If the bulls can remain strong then there could be some significant levels broken on some of the forex majors.

DXY   16072014

Breaking the support band on EUR/USD at $1.3574 was a key near term move yesteday. The pressure now is mounting on the initial key low around $1.3500 and below that the $1.3475 February low. I would still be looking to sell into strength with anything into the band $1.3574/$1.3585 or even up to $1.3600 a chance to sell again.

GBP/USD has suffered today after the UK employment data which was released at 09:30BST. The unemployment data was in line with expectations at 6.5%, but it was the disappointment in the averages weekly wage growth which has hit sterling. A drop to just growth of 0.3% was below 0.5% expected but also being on the opposite trend to CPI inflation, this will hold the Bank of England back from raising rates. The Short Sterling Interest Rate futures have moved out slightly and although the market still expects a December 2014 tightening, the chances have just been reduced slightly. This has pulled cable lower today. I would be looking for the support around $1.7100 to hold and that this correction will be supported. I am however a touch more cautious in my bullish outlook for cable than I was earlier this morning.

USD/JPY continues to drift higher into what I believe will be a “sell zone” between 101.80/102.00. This is a resistance band over the past few weeks and I believe will be around where the sellers will start to become interested again. There would be a good stop above 102.30 too.

Gold has formed some support today above the low at $1291.70 but is struggling to breach $1300. I see a lot of mixed signals on gold due to the sharp sell-off in the past couple of days which looked to be a case of someone unwinding a large position. On a medium to longer term perspective, the breaching of the downtrend since October 2012 was a positive development, whilst the support of the 144 day moving average is around $1291 and also just below is the pivot level support at $1280. I can see some mixed trading in the next few days as the price settles down, but if these supports can hold then gradually I think gold will begin to regain its poise once more.

 

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