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Dollar continues to strengthen amid supportive yield differentials

Market Overview

The dollar remains strong as traders continue to contemplate the renewed divergence in monetary policy paths of the major central banks that has been reiterated in the past week. At the ECB central bankers forum in Sintra, Portugal, the Fed chair, Jerome Powell, did little to tell us anything new, but reinforced the view that the case for raising rates in the US was “strong”. Contrast this with Mario Draghi and his “patient, prudent and persistent” line of the path for the ECB. Governor Kuroda of the Bank of Japan was his usual dovish self, whilst Philip Lowe of the Reserve Bank of Australia remains cautious on inflation. Powell and the Fed remain the only real hawks in town. Treasury yields continue to creep higher (10 year yield back to 2.94% today) and the dollar is again making ground across the forex majors this morning. Yield differentials continue to be supportive and the Dollar Index is looking to hold a breakout above the 95.15 October/November highs. One thing that has struck me though looking at the charts, is that the US dollar is becoming stretched and this could give rise to some sort of contrarian snap back. This comes as, even after a dovish Draghi and hawkish Powell, EUR/USD continues to cling on to its key support around $1.1500. The SNB and Bank of England policy decisions are next on the agenda today.

Dollar hawk

Wall Street closed mixed last night, with the Dow lower again, but the S&P 500 mildly higher +0.2% at 2767, whilst US equities futures are calling for decent early gains. Asian markets have been mixed also overnight, but the Nikkei was higher by +0.8% as the yen continues to weaken. European markets are also called higher In forex, the dollar strength continues to play through the major pairs, with yen underperformance as risk appetite continues to recover. In commodities, this dollar strength is also impacting again on gold which is lower, whilst oil is focusing more on tomorrow’s OPEC meeting. With news that Iran may be willing to accept some small increase in production levels, this has dragged oil prices lower this morning.

Central banks take the focus for traders today with the Swiss National Bank and Bank of England both on the economic calendar although neither should surprise too much. The SNB monetary policy decision is at 0830BST and is expected to again stand pat at -0.75%. Perhaps more interest will come with the BoE monetary policy decision at 1200BST. Although again no move is expected on either rates at +0.50% or stock of asset purchases (at £435bn). However it will be the vote on rate which may be interesting, last meeting at 7-2 and is again expected to be 7-2 (with the two dissenters Ian McCafferty and Michael Saunders). However, also with comments from Dave Ramsden recently suggesting the Q1 growth disappointment was temporary, could the MPC begin to point towards an August hike? Also look out for US data including the Weekly Jobless Claims at 1330BST which is expected around the usual levels of 220,000 (218,000 last week) and the Philly Fed Business Index at 1330BST which is expected to dip to +29.0 (from +34.4).



Chart of the Day – EUR/NZD    

The ECB may have given a dovish surprise last week but the euro has recovered strongly against the Kiwi (with trade tensions having been a big factor in Kiwi underperformance). The recovery on EUR/NZD has moved decisively in the past few sessions with yesterday’s session seeing a closing breakout above key near term resistance at 1.6840. This is an important move because this resistance was the high posted as the ECB announced last week. The momentum indicators are also leading the market higher, with the RSI at 5 week highs, a MACD bull cross buy signal and Stochastics rising strongly. Closing above 1.6840 has completed a small base pattern of c. 270 pips to give an implied recovery target of around 1.7110. Whilst there is initial resistance around 1.6950 this would simply be a continuation and rally within the medium term range that has been developing throughout 2018. The hourly chart shows positive momentum configuration and a run of higher lows meaning that there is a band of support between 1.6740/1.6840 to use as a buy into weakness. A failure of the bull run and a move below 1.6700 would shift the outlook negative once more.



Once more the euro is drifting lower and the key floor of the May low around $1.1500 remains under threat. However, the real candlestick bodies are small (yesterday’s close lower of 18 pips) and the market closed well off the lows of the day again. There is an undoubted negative bias still to this chart, and momentum indicators are still deteriorating in negative configuration, however this remains a tentative sell-off (also, given the strength of the dollar across other majors, the euro is holding up relatively well). All points to a test of $1.1500 and a closing breach would open $1.1300 as the next basis of support, however it is remarkable that the euro has had a lot thrown at it this week, yet still the support is intact. The hourly chart in effect shows a range play (once more, albeit with a mild negative bias). Resistance initially at $1.1600 before the main near term pivot at $1.1640. Support around $1.1530 protects the May low at $1.1505.



The sellers remain in control of Cable as the market again closed lower yesterday and has continued lower early today. A small doji candle completed for yesterday’s session could though make traders think a little, as this denotes a degree of uncertainty in the move. However so far today there has been little sign that the sellers are drying up quite yet. An intraday bounce (on sterling on the back of the UK Government winning a crucial vote on Brexit in Parliament) was quickly snuffed out and Cable seems set to continue lower. With the old support around $1.3200 acting as a basis of new resistance, a retreat to test the $1.3025 key support of the October/November lows remains on. Momentum indicators retain their negative configuration and there is little sign of any bull recovery in the offing. It would need the hourly chart to position for the RSI consistently above 60 and hourly MACD lines above neutral, for a more positive outlook. Also a decisive break above yesterday’s $1.3215 would be required.



The dollar bulls have regained the ascendency once more after their wobble earlier in the week. A positive candlestick yesterday may have been an “inside day” session yesterday, but the bulls have continued higher in the overnight Asian session and are pushing back on the 110.90 reaction high from last week which is preventing a retest of resistance at 111.40. Pulling above the 110.00 pivot of the past couple of months certainly gives the outlook a positive bias now and momentum indicators are positively biased. However there is still a degree of uncertainty showing on the MACD lines which still points towards a ranging market (below 111.40) that should lead to caution when chasing the market higher at these levels. The hourly chart shows that if this is a range play, then the hourly RSI over 70 could begin to limit upside potential. There is a band of support around 110.00/110.25 for a retreat.



Dollar strength and the market beginning to regain risk appetite again is not a good recipe for the gold bulls. Having broken the support at $1282 last Friday, the market has hardly looked back. This is shown in the acceleration of the selling pressure and the formation of a strong bear candle yesterday closing $7 down and at the low of the day. The move has continued early today and any intraday strength remains a chance to sell. Momentum indicators remain strongly negatively configured, with the RSI now well below 30. The fact that this has not encouraged any degree of support yet is certainly a concern amidst this trending move, however it remains historically very stretched and it will be interesting to see how the market reacts should a positive session manage to form. For now though the hourly chart shows that the market continues to post lower highs and lower lows, with resistance initially at $1270 and then around $1275. There is an old basis of support at $1260/$1265 but little really to prevent an ongoing retreat towards the December low at $1236.



WTI continues to trade within its recent range between $63.60/$67.15 as a larger than expected EIA crude inventory drawdown helped to build support again yesterday. The market is likely to remain within this range once more today with near term technical signals suggesting a lack of intent by traders to take a view ahead of the OPEC meeting on Friday. There is support of higher lows at $63.40 and yesterday’s low at $64.00 to help underpin the range, whilst resistance between $66.50/$67.15 acts as a near term ceiling now as the market has dropped back at the open today. There remains a mixed look to momentum indicators with RSI habitually below 50 and MACD lines still struggling for any direction, but also the Stochastics are rising. With the run of lower highs in recent weeks, it is difficult to see much longevity of any run higher ahead of the significant outlook changing move that is likely to come on the OPEC meeting.


Dow Jones Industrial Average

Even though the bulls have stopped the run of sharp downside breaks at the open, perhaps the failure of the market to embark upon a recovery as risk appetite had improved will be of greater concern. Another negative session leaves the market contemplate further downside as momentum indicators continue to deteriorate. The deterioration in the Stochastics is accelerating, wilst the MACD lines are also in decline. However, if the RSI were to start positioning below 40, then this would magnify the concern. For now there is a degree of consolidation around the 38.1% Fibonacci retracement of the 26,616/23,345 bear move which comes in at 24,595. However the risk would also be that a decisive close below this Fib level would open the next Fib hich is 23.6% at 24,117. The next key support is at 24,248. The hourly chart shows how intraday rallies are seen as a chance to sell, with resistance now 24,805/24,825 initially.

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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.