As we move towards the key risk events of the week there is a sense of building dollar strength once more as the bulls lie in wait. Although there has been no decisive directional move in the past couple of days, the dollar bulls defended against an threatened correction yesterday and remain largely in control. This comes as Treasury yields have ticked higher again, whilst gold remains under downside pressure amidst improved risk appetite. This is reflected in the Wall Street indices posting all-time closing highs. There is a sense that major forex pairs are consolidating in front of the Fed decision which is expected to announce a third 25 basis points rate hike of 2017 on Wednesday. It is interesting to see the dollar ticking back lower again in early moves today. However, this looks to be a consolidation within key breaks, with EUR/USD under $1.1800 and USD/JPY above 113.00. Will Cable also break down below its key support at $1.3335 today to make the hat trick? It is still likely to be upside traction on the longer dated Treasury yields which determine a decisive trending move on the dollar, and for that the Fed needs to convey a positive message for inflation into 2018.
Wall Street ended a quiet session with all-time closing highs (S&P 500 +0.2% at 2560) and whilst Asian markets have been lower overnight (Nikkei -0.3%) the European indices are pushing higher again early today. In forex there is a slight slip on the dollar as the European session has taken over, however there is a lack of any real direction to speak of aside from the continued gains on the Kiwi in the wake of the decision to appoint Adrian Orr as the next RBNZ governor. In commodities, with the slip on the dollar, gold has ticked marginally higher, but this is not expected to last. Oil has also made firm ground today as Brent Crude prices have been lifted by a cracked oil pipeline in Scotland that has impact on North Sea oil supplies.
Focus will be on UK inflation today and whether Bank of England Governor Carney will need to write a letter to Chancellor Hammond explaining why the inflation rate has gone more than 1% above the 2.0% target. Consensus suggests that he may just be OK with the announcement of UK CPI at 0930GMT expected to show headline CPI stayed at +3.0% for November. Also watch the core CPI which is expected to remain at +2.7%, whilst the PPI Input prices is expected to rise back to +6.8% which is a concern as this reflects increases in raw materials remain a problem. The German ZEW Economic Sentiment at 1000GMT is expected to show a slight dip to +18.0 (down from +18.7) which would still be fairly strong. The US PPI inflation data is at 1300GMT and is expected to show headline PPI picking up to +2.9% (from +2.8%) whilst core PPI is expected to drop slightly to +2.3% (from +2.4%).
Chart of the Day – EUR/NZD
This is a key moment for Euro/Kiwi. The market has been trending higher for several months in an uptrend channel but the formation of a three week top pattern is now questioning the longevity of this channel now. A top has been threatening for a couple of weeks but yesterday’s strong bear candle that closed below neckline support at 1.7080 now completes the pattern. This now implies just over 300 pips of downside in the coming weeks to 1.6780. The market has continued lower and is now testing the uptrend channel which is supportive around 1.6950 today. Momentum indicators look corrective but for now only within the channel. In the past three months, the RSI has consistently bottomed between 46/48, which is being breached today, whilst the Stochastics are also increasingly negatively configured and the MACD lines are accelerating lower. The rising 55 hour moving average has been an excellent gauge of support (at 1.6885)for corrections in recent months and flanks the uptrend channel. The reaction to what is now a resistance zone 1.7080/1.7265 could be telling in the next few days, with this already becoming a basis of resistance. Another failed rally around here would really begin to increase the downside pressure on the channel. Trading against the trend tends to be dangerous and apart from the top pattern there has been no real signals to suggest the market is moving decisively lower. Another bear candle today would help though.
There is a real lack of direction on EUR/USD as the market seems to be drifting towards the two key central bank decisions this week (Fed on Wednesday and ECB on Thursday). Yesterday looked initially to be a fightback from the euro bulls but it petered out into the close with the market forming a doji candle close to the day low. The market is also trading within a clutch of ever flattening moving averages, whilst the momentum indicators become increasingly benign. The hourly chart shows yesterday’s rally failed just under $1.1815 which was Thursday’s high and initial resistance, whilst settling above Friday’s low at $1.1730. These are now the initial levels to watch for a directional break but the market is showing little sign on the hourly momentum indicators of any real appetite to take a view in front of the key events later in the week.
With the dollar gaining strength again, the Cable bulls are skating on very thin ice now. The uptrend of the past four weeks is creaking today, whilst the support of the breakout above $1.3335 is coming under significant scrutiny. The problem is that the momentum indicators are already posting negative signals. With the Stochastics tracking decisively lower, the MACD lines are today posting a bear cross. If the RSI also begins to track below 50 then the market will be turning decisively corrective once more within the primary recovery trend. Last week’s intraday low was around $1.3320 and a close below here would suggest a bigger correction back towards the next support at $1.3220 and the support of the 2017 uptrend around $1.3200 today. However the hourly chart shows a basis of support coming in overnight with momentum not decisively corrective. Initial resistance is $1.3370 and then around $1.3400.
As the uptrend of the past couple of weeks continues to build, corrections will be seen as a chance to buy. The breakout above the pivot at 113.00 was a key near term move that has opened the multi-month range highs at 114.25/114.70 and any retreat on an intraday basis towards the breakout support will be an opportunity for the bulls. Momentum indicators are building as a positive force with the RSI settling above 50, whilst the MACD lines are rising, with the Stochastics in bullish configuration. The hourly chart shows the market is consolidating in the past couple of days but this is more of a pause for breath than a suggestion of a turn around (possibly a reticence in front of the Fed?). There is a band of support initially between 113.10/113.25 with resistance at 113.70.
The technical outlook for gold reflects a market under bear pressure. Since making the decisive break below $1260 there has been a shift in sentiment, with intraday rallies quickly being pounced upon by the sellers as momentum has deteriorated. The MACD and Stochastics indicators are both decisively now corrective and the market is building a new trend lower now. There is a near term “sell zone” between $1251/$1260 which the price is now failing in repeatedly, whilst the near term downtrend comes in today at $1257. Expect further intraday strength to be sold into for a retreat to the implied $1220 target, however there is little real support until the key July low at $1204.50. The hourly chart reflects this outlook with the hourly RSI failing in the 50/60 region and the hourly MACD lines failing around neutral.
The oil bulls have responded well to last week’s strong bear candle, having now formed three consecutive strong bull candles and being well set up for a fourth today. The bulls are answering a lot of questions posed after the momentum indicators broke their long term uptrends, but there now needs to be a break back above $49.05 to really stamp their authority again. The move above $58.00 which had become a near term pivot has added to the improving picture and the hourly chart is showing a far more positive configuration now as corrections are being bought into. A close above the pivot at $58.00 would be bullish today for a test of $59.05. Near term support at $56.90 is growing in importance too.
Dow Jones Industrial Average
It may have been something of an understated move but the Dow has posted yet another all-time closing high. The bulls will also point to the fact that the market also closed for a second successive session around the day high. The next test will be for a move on the all-time intraday high at 24,534 which was posted last Monday in the wake of the Senate passing tax reform. The hourly chart shows strong momentum configuration as the bulls build in a steady, if unspectacular fashion. Holding above the reaction low at 24,101 will now be positive and there is a near term pivot at Friday’s low of 24,225 which will help to determine the continued formation of higher lows.
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