Last updated: May 3rd, 2017 at 09:58 pm
Although very few people would have seriously expected the Federal Reserve to hike rates last night the decision to hold rates still created something of a stir. The dovish shift in the FOMC dot plots and Esther George removing her dissenting call for a rate hike has hit the US dollar but also the cutting of growth expectations has helped hit risk appetite and helped to support safer haven plays once more. Treasury yields have fallen sharply, whilst gold has pushed higher again. The yen has also been a key mover, with significant strength overnight helped by the decision of the Bank of Japan to once more stand pat. Will this Fed decision once more change the direction of the dollar and maintain the dollar weakness? The minor rebound on the Dollar Index has now been reversed and is once again moving in direction with Treasury yields. The Brexit fears have tended to help support the dollar (still seen as a relative safe haven) but the Fed has changed its course for now. It will be interesting to see how long this lasts for, with the Brexit vote just one week away now.
On Wall Street, the S&P 500 saw marginal weakness into the close, but the Asian markets have been hit by the yen strength, with the Nikkei -3.0%. European markets are also weaker at the open today. In forex markets we are seeing a rather mixed outlook developing again. The yen is the big mover, strengthening by 1.8%, whilst the euro is also holding on to yesterday’s gains. Sterling is under pressure once more with focus now turning back to Brexit, whilst the Bank of England monetary policy decision today is unlikely to make much of an impact. Commodity currencies are showing mixed performance, with the Aussie weaker despite upbeat unemployment data, whilst the Kiwi is again an outperformer. With the dovish Fed, the gold price has broken out to its highest level since mid-2014, whilst oil is under pressure again.
Traders will be watching for the Swiss National Bank at 0830BST although no change is expected, whilst the Bank of England monetary policy is at 1200BST and again no change in rates (at +0.50%) or voting (9-0-0) is expected. UK Retail Sales are at 0930BST and are expected to drop slightly to +3.8% YoY on an ex-fuel adjusted basis (+4.2% YoY last). US CPI is at 1330BST with an expectation of the headline reading staying at +1.1% with the core data slightly higher at +2.2% (+2.1% last). US weekly jobless claims are at 1330BST with 267,000 expected (264,000 last week). The NAHB Housing Market Index is at 1500BST and is expected to improve slightly to 59 (from 58).
Chart of the Day – AUD/USD
The Aussie managed to maintain a risk improvement yesterday in spite of the FOMC decision which just pulled the reins a touch into the close. The positive candle that was posted seemed to signal the return of the Aussie bulls after the four day decline, with the support at $0.7327 being bolstered (and now becoming key). Today’s weakness suggests that there is a battle going on for control now with momentum indicators appearing to be rather mixed. Despite coming off the highs in the wake of the Fed, yesterday’s intraday move to a three day high suggests that the bulls are eager to get back in control but has the rather downbeat Fed changed the outlook again? The intraday hourly chart shows that the near term momentum is more positively configured despite the early weakness today and the old pivot at $0.7385 could now be considered to be a key indicator for the outlook. Yesterday’s high at $0.7444 is initial resistance with resistance at $0.7505 now key.
Has the Fed changed the path of the dollar again? The dollar strength of the past week that was dragging EUR/USD lower now seems to be ready to turn higher again in the wake of the dovish FOMC meeting. The reaction low at $1.1185 from Tuesday has been bolstered by a bullish candle that now appears ready to continue today. From a technical perspective it is interesting that this support has also maintained a bullish uptrend that dates back to the December low. The momentum indicators are quickly looking do away with the corrective outlook and to be far more neutrally configured. The hourly chart shows the improvement since the Fed announcement but the move now needs to breach the resistance initially around $1.1300 to confirm the turnaround. This would then re-open the pivot band around $1.1330. The hourly chart sows initial support is now at $1.1245.
The strong bull candle on Cable from yesterday poses questions about the recent sell-off but there is much more that needs to be done before a turnaround can be considered as sustainable. The technical outlook remains near term negative and a failure to break back above the old support now turned new resistance at $1.4330 would keep the bear pressure on. The fact that a bull candle of over 100 pips has hardly done anything to really improve the outlook goes to show the magnitude of the sell-off. Even looking at the momentum indicators which remain firmly in bearish configuration, with the RSI falling over the past 3 weeks, the MACD lines now negative and the Stochastics barely even registering yesterday’s rebound. The early fall back in the Asian session today suggests that rallies are being sold into. The rally has peaked at $1.4218 which is now the resistance to watch today, a level that also helps to protect $1.4275 and more importantly $1.4330. The support is in place at $1.4090 but I expect this to come under further pressure as the sell-off resumes.
A double dose of central banks has driven another strong sell-off. A dovish move from the Fed and the BoJ standing pat has all added up to another big sell-off on Dollar/Yen. The pair initially tested the 105.52 support during the FOMC press conference but held on, only for the support to be smashed by the BoJ overnight. The breakdown has driven a sharp move to the downside with the pair at its lowest since September 2014. The next real support band is an old trading range from 2014 between 101/104. The momentum remains deeply bearish with RSI now moving below 30 (in trending moves such as this one, the RSI has historically not bottomed until 20), whilst the MACD lines and Stochastics are also very bearish. There is little resistance until 105.52 now which was the old breakdown. The caveat is that once a technical rally sets in it could be a sharp bounce again, however for the time being the momentum is very much with the sellers.
A dovish Fed and dollar weakness has helped to give gold renewed energy for the push higher. With 8 completed bullish candles in the past 9 sessions, the move has now broken the key resistance of the May high at $1303.60. The big question is whether this breakout will continue? I am mindful that the recovery in gold has been close to a mirror image of the May sell-off which leaves me a little cautious. I have been surprised by the continuation of the run higher however, this time it is fuelled by a dovish Fed and fears over a Brexit, the gold price has been strong. The RSI reflects this strength with momentum, pushing above 70 (a rally in February got to 86 on the RSI). The move has also broken above $1306.20 the January 2015 which has now opened a minor high at $1322.60 and the key high at $1345.00 from July 2014. Following the move last night, the negative divergences on the hourly momentum indicators have been aborted. Initial support is at $1291.40, with $1276.00/$1278.00 now key near term. The bulls are in control.
The further slide on the oil price is now putting significant pressure on the support of the medium term uptrend that has been in place since February. Although the candles have hardly been viciously negative, that does not get away from the fact that the price continues to decline and the reaction to the FOMC decision last night (presumably due to the lower growth projections) has continued the slide in the price. The support at $47.75 which was the early June reaction low has been breached and now this opens $46.75 which is the more important support. The breach of the uptrend is a concern, but what would be more of a concern would be a move on the RSI below the 45 low that was seen with the March low. Momentum indicators subsequently are deteriorating and show the selling pressure is building. The hourly chart shows that there is now resistance in pace around $48.70 from the past couple of days which is strengthening the resistance at $49.28.
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