18/06/2014: The dollar continues to regain its poise as traders speculate on a potentially hawkish Fed

Market Overview

Wall Street closed for a third day with minor gains as markets geared up for today’s monetary policy announcement by the Federal Reserve. Asia markets were mixed overnight, although the Japanese Nikkei 225 resumed its advance as the yen weakened once more against the dollar. European markets are following Wall Street higher in early trading and are showing slight gains.

In front of the Federal Open Market Committee meeting today (which gives its announcement at 19:00BST) forex trading is rather cautious, with little real move by any of the major currencies aside from some slight yen weakness. For several days, the market has been looking towards what might be the result of the key central bank meeting, but this speculation has intensified since yesterday’s announcement of higher than expected US inflation data. This release has heaped the pressure on the committee doves (one of which is Janet Yellen herself). There will now be increased calls for an earlier rate hike than the market had been anticipating (which is currently around June 2015). Any hawkish leaning from the Fed statement or in Yellen’s press conference could significantly strengthen the dollar.

In other announcements today, the Bank of England adds more meat to the bones of its latest monetary policy meeting when the minutes are published today at 09:30BST. The market already got a taster during Mark Carney’s Mansion House speech last week, however any further hawkish leaning could impact on Sterling.

Chart of the Day – FTSE 100

On Friday there was a close below 6782 which completed a top pattern and now implies a 100 point further correction towards 6682. This move would see the FTSE 100 back to trade around the support of the primary uptrend once more. The momentum indicators are supportive of a correction, with the RSI at a 2 month low and MACD and Stochastics both in a corrective configuration. Yesterday, we saw the FTSE 100 find some support but this could just be the pullback rally towards the 6782 neckline. With intraday hourly moving averages falling in bearish sequence, a failure in the resistance band 6782/6800 with a negative signal could see the near term selling pressure ramp up again. The intraday hourly charts suggests it would need to hold a recovery above 6850 to suggest the corrective outlook has been aborted.

FTSE   18062014

EUR/USD

After Monday’s attempted rebound, the Euro was once again dragged back as it hit the resistance at $1.3585. This trading period has now got a very similar look to it as a couple of weeks ago prior to the ECB decision. A rangebound series of days has formed in the run up to the FOMC decision. Technical indicators remain in bearish configuration and suggest there is little appetite for a recovery. Expect this range between $1.3500 and $1.3585 to continue until the FOMC announcement and Janet Yellen’s press conference that all kicks off at 19:00BST. The intraday hourly chart is giving little more information with moving averages and momentum indicators increasingly neutral. I suggest waiting for a decisive break of this range and the technical studies are suggesting this will be lower in due course.

EURUSD   18062014

GBP/USD

Cable backed away from another assault on the key $1.7000 level yesterday as the recent bull run that has achieved $1.7010 looks to have just lost some of the upside impetus. Whilst the medium to longer term momentum indicators are still positive, the hourly intraday chart shows a plateauing of momentum and price. At this stage this does not mean there will be a reversal, and the Cable bulls may just be having a breather. But there is a suggestion that a consolidation is underway, and is likely to remain in place until tonight’s Fed meeting. Technically, the reaction low in place from yesterday’s UK inflation announcement, at $16936 is the support and a breach would re-open the supports of $1.6920 and $1.6880. A hawkish Fed is possible after the upside surprise in yesterday’s US inflation and this would help to drag Cable lower.

GBPUSD   18062014

USD/JPY

An interestingly dollar positive move could be underway once more as the consolidation of the past few days is looking to culminate in a move to the upside. The technical indicators on the daily chart remain all rather neutral, but the price is now beginning to make a move. This rise is now taking Dollar/Yen into a key near term test. The resistance of a two week downtrend which comes in around 102.24 is now being tested. Furthermore, the overhead supply in the 102.20/102.40 area is sizeable. So if these can both be overcome then the bulls will begin to resume control. Intraday moving averages are improving, as are the hourly momentum indicators. A hawkish Fed tonight would certainly add to the dollar strength.

USDJPY   18062014

Gold

An intraday recovery yesterday has resulted in an encouraging candlestick for the gold bulls, as an arguable hammer candle has been left. However, as the candle is not perfect, this needs to be followed by a positive day today if the bullish nature of this candle is to be confirmed, and as yet this is not being seen. The concern for the bulls is that the daily chart has several factors that simply suggest that this is a selling rally, with momentum indicators retaining a bearish configuration and the overhead resistance in place with the 144 day moving average (currently $1278). Furthermore, looking at the intraday hourly chart, yesterday’s recovery has rolled over under both the 55 and 89 hour moving averages and the hourly MACD and RSI indicators are both suggesting this is the limit of any potential rally. Expect a retest of the $1257.50 key old resistance turned new support. A breakdown would go a long way towards suggesting the rally was over. Overhead resistance comes in at $1273.25 and $1284.85.

Gold   18062014

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