The dollar has been gathering strength in the wake of the FOMC decision on Wednesday, but can the dollar rally continue? The initial reaction to the Fed move was arguably a touch subdued with the market seemingly questioning Yellen’s upbeat assessment of inflation. However strong readings on regional Fed surveys yesterday (on New York and Philly Fed) have helped to drive a dollar recovery. This is still though very early days with the dollar index rallying back to where it was just a week ago, whilst the flattening yield curve remains an issue and the 10 year Treasury yield is still below where it was prior to the announcement of US CPI on Wednesday. This still questions the longevity of the dollar rally. Although key near term breaks have been made against the yen (above 110.80) there are considerable challenges still ahead for the dollar bulls. The Bank of Japan held rates steady overnight whilst tweaking its growth forecast mildly higher but inflation mildly lower. It is steady as she goes for the BoJ. In Europe, Greece seems set to continue with its bailout as Eurozone finance ministers agreed to unlock another tranche of €8.5bn of the country’s €86bn bailout, meaning that Greece can repay around €7.5bn of debt becoming due in July.
A rebound into the close helped Wall Street put a positive spin on a mildly negative session with the S&P 500 -0.2% at 2432. Asian markets were broadly positive overnight with the Nikkei +0.6% whilst European markets are all seeing gains in early moves today. In forex there is a risk positive look to market moves, with the yen being the chief underperformer, whilst the other majors are all seeing slight gains against the dollar. In commodities, gold is mildly higher as support has formed after recent selling pressure, whilst oil is all but flat on the day.
Markets will pay initial regard to the final reading of Eurozone CPI at 1000BST which is expected to be confirm the flash readings of +1.4% on headline CPI and +0.9% core CPI. US Building Permits are at 1330BST with a mild tick higher expected at 1.25m (from 1.23m last month), whilst the Housing Starts are expected to improve to 1.22m (from 1.17m last month). The prelim University of Michigan Sentiment is at 1500BST which is expected to pick up to 97.2 (from a downwardly revised 97.1 last month).
Chart of the Day – Silver
The with the Fed tightening and concerns over falling inflation, this is a tough time for precious metals. This is reflected in the decline on silver since the Fed meeting. The recent daily candles reflect volatility that is yet to settle down. However the outlook had already been deteriorating since the failure of the early June support at $16.96 which began the formation of a new trend lower. The Fibonacci retracements have consistently been key turning points for silver and it was interesting to see Wednesday’s intraday rally peaking just under the 50% Fibonacci retracement at $17.33 of the $18.65/$16.01 April sell-off. Subsequently too the 23.6% Fib at $16.63 has become supportive, whilst the 38.2% Fib at $17.02 is also a basis of resistance now. These are near term gauges for silver and the key levels to watch. A closing breach of $16.63 re-opens the key low back at $16.01 with initial support at $16.43.The momentum indicators are increasingly corrective now with the RSI falling back below 40 but also with downside potential, whilst the MACD lines have just crossed lower and the Stochastics are negatively configured. Rallies are now being sold into and with yesterday’s failed rebound, there is now a band of resistance near term at $16.96/$17.09.
The dollar has strengthened since the FOMC decision on Wednesday, but is this a sustainable turnaround and the beginning of a new trend? EUR/USD has been tracking higher with higher lows and higher highs now since the middle of April, but there has been a shift in sentiment in the past two sessions. Wednesday’s intraday sell-off into the lose has been followed by a strong bear candle that has broken the initial support at $1.1165. This is coming with momentum indicators that are now gaining traction to the downside in a corrective move. The RSI has dropped back to 50, whilst the MACD and Stochastics lines are pulling lower too. The support of the long term pivot at $1.1100 is still key. The late May reaction low found support just above at $1.1108 and this is the first key higher reaction low within the two month bull run. A failure of this support would end the medium term bull control and potentially begin a new trend lower. Subsequent support would be $1.1020 and $1.0850. The hourly chart shows the breach of $1.1160 is now becoming the basis of resistance near term with further resistance between $1.1180/$1.1200. Continued failure below these levels today will add to the growing corrective pressure, however the big level to watch is $1.1100.
The major level to watch on Cable is $1.2775. This was the old long term breakout that became supportive throughout late April and May but then was breached on the UK election result. The market has since failed to sustainably break back above this level of resistance. Volatility in the intraday moves has been elevated in the past week with a series of significant fundamental events and data which means that $1.2775 is coming under repeated pressure now. Once more this morning, despite the renewed dollar strength in the wake of the FOMC, the pressure is on what is now a key pivot. Momentum indicators continue to suggest that since the sell-off last Friday, rallies are seen as a chance to sell. The hourly chart shows the market is more of a range play near term. The intraday resistance is at $1.2817but there is still plenty of overhead supply with which to scupper any sustainable rally. Any near term push higher is likely to find upside hard to come by. Support is $1.2720 and yesterday’s low at $1.2690.
The yen had initially been resistant to the strengthening dollar but succumbed yesterday as the US data same in stronger than expected (a change from recent times). This has now broken the downtrend that has been in place over the past five weeks and improves the outlook considerably. The move has breached the first resistance at 110.80 which arguably completes a small base pattern and implies 170 pips of further recovery towards 112.50. That would mean that the market is set to also recover to the 38.2% Fibonacci retracement of 100.07/118.65 at 111.55, around which is also an old medium term pivot at 111.60. I have previously taken the 111.60 pivot as a watershed for the medium term outlook on Dollar/Yen and it would be a real statement of intent following the FOMC decision if the dollar bulls could push above the resistance. Momentum is picking up now with a bull cross on the MACD lines and Stochastics rising above 50. This is now an improving chart but the resistance overhead needs to be overcome. There is a lower high at 111.70 to breach too. The hourly chart shows there is support initially at 110.40/70.
The near term strengthening dollar has also driven a breach of the key medium term pivot on gold at $1261. Closing breaks through this pivot have tended to be key in recent months and the confirmation of the latest breakdown has negative implications for gold. The momentum indicators are increasingly turning from corrective to medium term negative, with the Stochastics falling into bear territory and RSI below 50. With initial support at $1252.50 also breached, the next supports to come into view are at $1247.25, $1245.40 and then an old pivot at $1240. The hourly chart shows negative configuration on momentum indicators with rallies being seen as a chance to sell. There is an initial “sell-zone” now between $1257/$1267.
The selling pressure continues for WTI with the market consolidating the sharp fall from Wednesday. The market remains well on course for the $44.00 downside target from the top completed at the beginning of the month. There is now a formation of a three week downtrend channel that is dragged the price lower and the upper resistance of this channel comes in today at $45.85 with any near term rally seen as a chance to sell. Today’s early rebound could give that opportunity. Momentum remains negatively configured with the MACD lines accelerating lower under neutral whilst the RSI has downside potential in the low 30s and the Stochastics are camped in bear territory. The likelihood remains that a test of the $43.75 low will be seen. The hourly chart shows a band of overhead supply now between $45.20/$45.70 whilst this week’s reaction high at $46.70 is growing in importance as resistance. Below $43.75 the next support is the November low at $42.20.
Dow Jones Industrial Average
Corrections remain a chance to buy with the Dow retreating back towards the 21,112/21,225 near term band of support and seemingly once more find willing buyers. Although Wall Street has been a touch more corrective since the FOMC, it will be interesting to see how long any near term corrections last. Yesterday’s opening gap lower was filled on the daily chart and the hourly chart remains positively configured. An uptrend channel over the past couple of weeks has held well and momentum configuration is strong. The initial support is yesterday’s low at 21,262 but the key support to watch for any real corrective more is at 21,160 which is the first real higher reaction low within the near term trend channel. Also watch the hourly RSI which has consistently found buyers returning around 45. For now the near term corrections are still a chance to buy.