18/11/2014: Dollar may be struggling today but don’t expect it to last

The key moves of the morning have shown the dollar is under pressure. Forex majors are rallying. The euro has jumped after the German ZEW Economic Sentiment came in ahead of expectations and showed a monthly improvement for the first time in 2014. Sterling has rebounded (slightly) after the UK CPI inflation figure increased marginally to 1.3%. The only major pair that the dollar is not getting punished against is the Japanese yen which has weakened after the news that Prime Minister Shinzo Abe would be delaying the implemntation of the second sales tax hike for 18 months, in addition to dissolving Parliament on 21st November for a snap general election. The other key moves have come with gold pulling away from its consolidation (a near term target of $1207 is derived from the break above $1994 today), and European indices pushing higher again.

As we move into the US trading, the big question is can these moves against the dollar be sustained? The Dollar Index (.DXY) is still struggling in this sideways range over the pas week or so, showing little desire for another upside break. However this is likely to be due to the lack of driving US data over the period. This could all chance tomorrow afternoon when the FOMC meeting minutes are released.  Therefore over the next day the dollar may continue to struggle.

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This dollar consolidation is certainly helping the gold price breakout. The move above $1200 used the support of $1180.70 basis of support and the outlook for the near/medium term gold price continues to improve. With momentum indicators continuing to suggest a rebound, the gold price has got some impetus behind it now. The $1207 immediate target in sight, the next level of resistance is around $1221.70.

However, I would say that forex pairs are unlikely to turn materially against the dollar. The near/medium term outlook for EUR/USD is slightly range bound, helped higher today by the positive German ZEW Economic Sentiment data. However the daily chart shows significant resistance from a downtrend and top pattern neckline around $1.2600. Using any rallies within the resistance band $1.2500/$1.2600 still seems the best way to play the euro currently. Also, GBP/USD may have ticked slightly higher today, but the chart remains incredibly bearish. Any strength towards $1.5690/$1.5735 resistance band seems to be a good opportunity to sell. Dollar/Yen may have just shied away from 117.00 for a second time, but with the announcement of Shinzo Abe this morning to delay the sales tax hike and call a snap election, the reality is that the Prime Minister is seeking a renewed mandate for “Abenomics” and that should include further monetary easing by the Bank of Japan in due course. This should continue to drive Dollar/Yen higher, re-affirming the series of higher lows  and the outlook of buying into weakness.

Intriguingly, the European indices have started to outperform Wall Street. I am not sure how long this will last though as the continuation of the consolidation on the S&P 500 is concerning. Once more today, despite the DAX trading well over a percent higher, the S&P 500 index futures are suggesting a basically flat open today. Wall Street has been the driver of global markets in recent weeks and without its backing, I am concerned for the longevity of a rally in Europe.  

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