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31/07/2014: Trading outlook ahead of the US session

The volatility certainly returned to financial markets yesterday as the US economic data drove investors towards the dollar. The big question today was whether the greenback would continue its run after a dovish outlook from the Federal Reserve.

Although the dollar has retained its broad dominance over the major currencies today, the volatility has started to calm down again. Furthermore, as we move ever closer to tomorrow’s Non-farm Payrolls report the volatility is likely to reduce even more. The run higher in the Dollar Index has been remarkable, with DXY paying scant regard so far to the key 81.3 pivot level as it has sailed higher.

DXY   31072014

Traders will now be looking out for the weekly jobless claims numbers to proved a new impetus into the afternoon. Expectation is for a slight increase back to 300,000 but anything with a “2” handle will be deemed to be yet another positive number for the dollar.

The final day in the month can often be characterised by a lack of conviction and some book-squaring, and it looks as though this could be the case once more. There has been little conviction behind EUR/USD this morning, and that has been despite the fall in Eurozone flash HICP (Harmonised Index of Consumer Prices) to 0.4% (from 0.5% and below the 0.5% forecast). All things remaining equal, the Euro would have been expected to drop on the news as it pulls the Eurozone ever closer to official deflation and should help to usher the ECB towards engaging full blown Quantitative Easing. However, the Euro has remained fairly well supported. After a straight-line decline of 250 pips in less than 3 weeks, the Euro is becoming deeply oversold against the dollar and a technical rally in the least is becoming ever more likely. Being naked short of the euro is becoming increasingly risky now.

Cable is just not stopping at the moment as the sellers continue to drive sterling lower. There is the basis of support around the 89 day moving average which is now at $1.6893 but the rate will need to rally almost immediately to maintain this as a viable level of support. In my view this is make or break for the long term sterling bulls. The way that this sell-off has developed suggests that there is a real swell of support for the dollar and with uptrends being broken, the 89 day moving average is one of the few bullish long term arguments left. Although RSI momentum is now at 30, it is increasingly weak and the next real support does not come in until around $1.6700. Trading prior to Non-farm Payrolls tends to be quite sedate so there could be some respite soon. It seems as though it will need a strong UK Manufacturing PMI in addition to a weaker than expected payrolls number to help traders who a long of Cable.

Dollar/Yen is stretched now. With the RSI at 70 momentum has quickly become overbought. However interestingly the entire trading day for today is outside the upper Bollinger Band. This is something that has not happened this year and suggests a stretched near term position and makes the likelihood of a correction quite high. Be careful therefore if you are chasing the price higher.

USDJPY   31072014

In the precious metals, gold and silver are both holding on to supports for now. The gold price needs to hold a close above $1290, whilst silver is looking to build above the key $20.50 pivot level once again. The outlook for the bulls is under pressure on both, but for now they are holding on by the skin of their teeth.

Equity markets are under pressure again today. The DAX is the main index that is feeling the strain. With major stocks such as Adidas and Continental warning about the impact that geopolitics in Russia will have on their business, any further news of sanctions and their impact will bite. The outlook for the DAX has taken a turn for the worse, with a decisive move under 9600. The next key level is 9400 now and rallies are being sold into, with the falling 21 day moving average (now 9742) the basis of resistance. Although there seems to be a disconnect between the performance of Wall Street and the European indices now, the S&P 500 is still forecast to open around 12 points lower. The support band 1945/1955 is increasingly important.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.