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Dollar and yields slip as US CPI inflation looms

Market Overview

Markets are continuing to react to Trump’s decision to pull the US out of the Iranian sanctions waiver, however, it is very interesting to see there has not been a significant safe haven flow that has arisen, in fact risk appetite is looking quite positive. The yen is underperforming across the forex majors, whilst there has been little pick up in gold, and Treasury yields have risen. The VIX index of options volatility has reacted lower and equities have bounced. The move higher on the oil price is a key theme through these moves and this is an inflationary aspect to the rise in yields, with the US 10 year yield moving above 3% again yesterday. It is also interesting to see that Treasury yields have just slipped back a touch overnight and this is pulling the reins on the immediate dollar strength, with interest rate differentials continuing to drive near term forex moves. Inflation is a key factor in driving yields, with the US PPI showing a downside surprise yesterday and the announcement of US CPI in focus this afternoon. China inflation was very slightly lower than expected on both consumer and producer measures. China CPI has dropped to 1.8% (expected to fall to +1.9% from +2.1% last month), with China PPI only ticking higher to 3.4% (expected to increase to 3.5% from 3.1% last month). From a UK perspective, the Bank of England’s Super Thursday is also added into the mix.

Inflation definition

After a period of consolidation in recent days, Wall Street closed higher last night and looks to be increasingly positively configured once more, with the S&P 500 +1.0% at 2698. With Wall Street futures ticking higher early today, Asian indices were mixed to slightly higher (Nikkei +0.4%) whilst European markets are also trading higher and with a risk positive bias the DAX Is performing well. In forex, there is a slight correction on the dollar, whilst the yen is an underperformer and the New Zealand dollar is under pressure in the wake of the RBNZ decision last night which saw forecasts for growth and inflation cut. In commodities, with the slight drop on the dollar we are seeing gold consolidating around $1 higher, whilst oil continues to climb to new multi-year highs, around 0.8% higher.

There is a big focus on UK rates and US inflation for traders today, with Germany and France on public holiday for Ascension Day. First up in the morning, traders will be on the lookout for UK Industrial Production at 0930BST which with a +0.2% MoM improvement forecast is expected to improve to +3.1% YoY (from +2.2% last month). The UK Trade Balance is at 0930BST and is expected to deteriorate to -£11.3bn (from -£10.2bn last month). For traders of UK assets, the main event is the Bank of England monetary policy decision at 1200BST. Today was meant to be the day that the UK would hike rates again (after the first hike in November) but given the deterioration in the UK economic data in recent weeks, expectations of a 25 basis points increase have been slashed and are no longer there. The MPC is expected to therefore hold rates at +0.50%. However, it is Super Thursday, so not only do we also get the meeting minutes, with this expected to again be a 7-2 decision (last meeting was also 7-2), but there will also be the Quarterly Inflation Report. Watch out for changes to inflation and more importantly growth projections. Across the Atlantic, focus is on today’s US CPI data at 1330BST which is expected to show headline CPI increasing to +2.5% (from +2.4% and the core CPI increasing to +2.2% (from +2.1%). Weekly Jobless Claims at 1330BST are expected to increase slightly to 219,000 (from 211,000 last week).


Chart of the Day –  EUR/AUD   

The euro remains corrective across the commodity currencies. On EUR/AUD despite Tuesday’s positive candle, the mini rebound has simply brought the pair back to find resistance once more at the two week corrective downtrend. Finding resistance at the confluence of the downtrend there is a pivot forming at 1.5965 The daily momentum indicators continue to suggest the intraday rallies remain a chance to sell, with the RSI and Stochastics quickly falling over again, whilst the MACD lines are still in decline. The inference of recent moves has been that the market is in retreat to test the key medium term pivot at 1.5800. The key April spike low at 1.5770 then becomes the key support that would prevent a further retreat towards the support of the long term trend channel which currently comes in at 1.5690. The correction remains on course whilst the pivot at 1.5965 remains a resistance. The hourly chart shows the minor rebound rolling over and the support at 1.5830 is the initial test now.



As the recent trend lower continues, rallies are still being seen as a chance to sell. Yesterday’s latest negative candle once more saw an intraday rebound that failed around the resistance of the now three week downtrend as the bears remain in control. Momentum indicators retain their negative configuration with the RSI in the mid-20s whilst the MACD and Stochastics are still deeply bearish. An early pic up today sees the market again testing the downtrend, and even if it were to be breached, there is nothing yet to suggest any decisive recovery is about to kick in. The hourly chart shows the momentum indicators simply unwinding back to areas where the sellers have repeatedly resumed control, with the hourly RSI back to 60 and MACD lines back to neutral. Resistance overhead at a near term pivot around $1.1900 whilst $1.1940 and then $1.2000 are then resistance. Pressure on $1.1815 is likely to resume and a test of the December low at $1.1715 cannot be ruled out.



Looking at broken downtrends and near term recoveries across the sterling crosses in recent days, the potential for a rebound of Cable is even now progressing, however there is much for the bulls to do still. Another neutral looking candle completed was a pure doji candle (very rare in the 24 hour forex market, where the open and close are exactly the same). This move has now broken the downtrend of the past few weeks. It is interesting that this is coming as the RSI and Stochastics are both starting to swing higher (although neither has a buy signal confirmed yet). The market is simply consolidating for now, but coming into this morning, there is a slight tick higher that will add to the bull confidence. The prospect of a near term rally is growing, and on the hourly chart there is a bottoming of moving averages and momentum indicators are more positively configured. Yesterday’s high at $1.3605 is initial resistance and a close above today would be effectively a 110 pip base pattern and suggest a rebound back to the old key breakdown at $1.3710. The Bank of England and US inflation could make this a volatile session, but ahead of these there is a subtle shift in sentiment on sterling developing.



The trend of dollar recovery remains strong, with yesterday’s solid bullish candle helping to bolster the outlook. The market is now eyeing the overhead resistance at 110.00 again which was last week’s rally high. A break above 110.00 opens the February high at 110.47 initially and beyond there is 111.50. Momentum indicators remain positively configured with the Stochastics and RSI ticking back higher once more but the MACD lines still need to be watched as they have converged but yet to decisively tick higher again (a possible warning sign of correction). The hourly chart is supportive with a positive configuration and there is a near term pivot around 109.40 to act as a floor. Corrections are being seen as a chance to buy. Support at 108.60 is increasingly key on a near to medium term basis now.



The support that still forms in the range $1300/$1310 is remarkable. Yet again it seems that intraday dips into this long term pivot band are being bought into as the bulls continue to defend this key medium term support. Another small bodied candle formed yesterday has seen the market trading back above $1300/$1310 this morning. However, this remains a market that seems intent on living on a knife edge at the moment, because whilst the support continues to hold, there is lack of momentum in the buying. The past four candles have all closed within a $2 range and again this morning there is little direction to speak of. Momentum indicators are reflective of a market that is in consolidation but also notable in the somewhat precarious position the bulls still find themselves. The RSI is hovering only just above 40, whilst the MACD lines have plateaued and the Stochastics are only marginally edging higher. The hourly chart shows a classic near term range formation. This is a market in need of a catalyst. There is initial resistance at $1319 but the bulls need to push above $1325 to drive a recovery. A move to close back below $1310 would put pressure back on $1300 once more.



Donald Trump’s announcement on Iran has driven the oil price back higher again. Yesterday’s breakout above $70.85 has taken the market once more to levels not seen since November 2014. Technically this remains a very strongly configured market. Aside from the volatility of Tuesday’s uncertain candle (the day of Trump’s announcement), candlesticks on WTI have all been solidly positive for more than a week, reflecting increasing bullishness. Momentum indicators are firmly in positive configuration and suggest that corrections continue to be seen as a chance to buy, but also suggest that there is further upside potential (RSI is only in the mid to high 60s). There is little real resistance until $73.25/$77.85 however the bulls will certainly be eying the 61.8% Fibonacci retracement around $76.50 and perhaps even $80 as the next psychological level. Tuesday’s spike low at $67.65 is a key support but the bulls will now look to build a new flow above the old breakout at $69.55 and the psychological $70.


Dow Jones Industrial Average

In recent days the market has been reluctant to take on an outlook of decisive improvement that would come with breaking through and leaving behind the 24,500 resistance. However, yesterday there was a tentative positive session that has now closed above 24,500 and suggests that the bulls are gradually taking on a positive outlook that can pull the market through old lower highs. Whilst this move needs to be confirmed today, there is an interesting improvement in momentum which is now beginning to come through, with the RSI ticking above 50, Stochastics rising and MACD lines also beginning to improve. A move above 24,580 would help today and then open the key April reaction high at 24,859. The bulls are tentatively moving through the crossroads and a positive bias is now forming. The support of a near term pivot at 24,200 is increasingly important now.

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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.