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22/07/2014: Trading outlook ahead of the US session


There has been a significant turnaround in investor sentiment through today amid the improving geopolitical situation concerning Ukraine. Although there are risks to this situation still, notably the reaction to further and far more stringent sanctions on Russia, investors are reacting positively today. Equities are higher, whilst safe haven trade flows are unwinding, with the Japanese yen weakening, gold trading lower and sovereign debt yields rising once more.

The US dollar though has strengthened today and has breached through the historic pivot level at 80.6 on the Dollar Index (.DXY) which is being mainly driven by weakness on the euro. The gains on the dollar could continue to push the index higher with 80.9 an initial barrier, but historically the chart shows that a breach of 80.6 subsequently opens gains towards 81.3, so there could be further strength for the dollar to come.

DXY   22072014

This dollar strength comes as traders ready themselves now for the release of US CPI inflation. The expectation is for a similar reading to May’s 2.1%, a number last month was dismissed by Janet Yellen as simply “noise”. Although spare capacity and wage growth are also on the radar for the Fed, if this CPI data persists at of just above the Fed’s 2.0% inflation target, then the doves on the FOMC may begin to get twitchy. After that we start to get the housing data, with the House Price Index at 14:00BST and then the Existing Home Sales at 15:00BST (4.97m annualised homes expected).

The floor at $1.3500 has been breached on EUR/USD but as yet the $1.3475 key February low remains intact. A breakdown would continue the path towards the $1.3375 target implied from the large double top on the daily chart. I remain bearish on the Euro and see any rallies now as a chance to sell. There is now minor resistance at yesterday’s reaction high at $1.3550.

However there are two majors in which I see the dollar strength as being just short term. Cable has once again drifted back towards the top of the support band around $1.7060. I remain a buyer into weakness into the support band $1.7000/$1.7060, so I will be watching for a possible buy signal. Furthermore, I do not expect this rally in Dollar/Yen to continue for too much further either. The resistance band 101.60/101.80 looks to be a good are for a selling opportunity.

In indices, the DAX has had a rough few days, but after such a significant decline yesterday, the index has seen a strong recovery today. The gap at 9744 remains unfilled and this will be the first target for the bulls. FTSE 100 on the other hand, has begun to perform well (at least against the DAX). The resistance at 6800 is the initial barrier to overcome, although the outlook remains mixed.

Gold continues to trade on geopolitical swings of sentiment and from a near term perspective is tough to call. I am of the increasing believe that over a medium to longer term basis the outlook is beginning to improve though.


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