Dollar falling despite FOMC rate hike

Market Overview

Janet Yellen and the FOMC met market expectations and increased the Fed Funds target range by 25 basis points to 0.75%/1.00%. There was no surprise in this move by the FOMC, but despite this, the market reaction was a sharp fall on Treasury yields and the dollar. This came with a mildly less hawkish tone than anticipated in the statement and the economic projections. There were only the most marginal of tweaks to growth and inflation projections by just 0.1% across the three year horizon, whilst keeping the longer run growth at +1.8% which is below trend growth has prompted the luke-warm response in the market. This dollar negative move now threatens to turn corrective at least for the near term with key market reactions across forex, commodities and equities. The dollar has dropped sharply across major forex pairs, whilst gold and silver have rallied too. This has also prompted equities to pull higher once more after a period of consolidation, as a more dovish than expected Fed is supportive for stocks.

dollar weakness

Aside from the Fed, the Bank of Japan also announced monetary policy overnight, but kept its short term rates at -0.1% and the target of purchasing 80 trillion yen of JGBs per year, but also had a more upbeat over Japan’s economic recovery. In Europe, the exit polls of the general election in The Netherlands suggest a decisive rejection of Geert Wilders’ far right Freedom Party. The incumbent Prime Minister Mark Rutte’s centre right VVD projected to win 32 seats to Wilders’ 19. The spread on French/German yields have tightened as a positive response to the rejection of Wilders and his extremist anti-Islamic views.

Equities are looking positive today after Wall Street pulled higher (S&P 500 +0.8% at 2385) with Asian markets also positive although the Nikkei was only +0.1% with the yen strength. Forex markets have stabilised this morning after the dollar got hit hard last night. Gold and silver are again pushing higher, whilst oil has found some support after the EIA oil inventories showed a surprise drawdown and broke a run of nine consecutive weeks of inventory build in crude stocks.

Traders will be looking at the Swiss National Bank to give monetary policy at 0830GMT with the SNB not expected to change rates from -0.75%. The final Eurozone CPI is at 1000GMT which is expected to confirm the flash readings of +2.0% on the headline CPI, and +0.9% on the core CPI. The Bank of England also announces monetary policy at 1200GMT with the MPC expected to hold rates at +0.25% with no extra QE purchases, whilst the MPC minutes are expected to show that the committee voted unanimously to hold these levels. US data comes  in the form of Building Permits (+1.26m exp) and Housing Starts (+1.26m exp) at 1230GMT which is mildly lower on both counts, whilst the Philly Fed Manufacturing is expected to pull back to a still very strong 30.2  from the previous reading of 43.3 which was the highest since 1984. JOLTS jobs openings are at 1400GMT and are expected to dip slightly to 5.45m (from 5.50m last month).

 

Chart of the Day – German DAX Xetra

Equities have been consolidating in front of the FOMC and the DAX has been no different. This has driven the market sideways in a move that has breached the uptrend dating back to December. However this trend break is more of a function of wait and see than any bearish factor. Whilst the market has remained supported above 11,893 the bulls have been maintaining their control. This is reflected in the positively configured momentum set-up which shows the RSI above 60, the Stochastics strong positive and the MACD lines also consolidating well above neutral. The hourly chart shows the neutral outlook, whilst the market has ranged between 11,917/12,082. This means that a breakout of around 165 ticks would be the implied target and around 12,245. The initial resistance at 12,067/12,082 is under pressure from the early gains, whilst a closing breakout would be bullish and open the next bull run towards the all-time high at 12,391.

EUR/USD

The outlook for the euro has improved  significantly over the past couple of weeks. Since the selling phase bottomed at $1.0490 a number of strong bull candles have helped to pull the euro up through some key lower reaction highs. Now with the latest strong bull candle that added 130 pips on the day the old resistance at $1.0710 has been decisively breached. This is the third in a sequence of candles that have been separated by minor corrective moves, but with the daily momentum indicators now reflecting a continued improvement, the bulls will start to look higher at the key medium term resistance band at $1.0800/$1.0850. The market is trading above all the shorter term moving averages and if the RSI can begin to push consistently into the low to mid-60s then the traction may be there for a sustained test of the overhead resistance. Corrective moves are now being bought into and it is interesting to see the breakout at $1.0710 now becoming the basis of support in the early moves today. Yesterday’s reaction low at $1.0600 now becomes the key support with $1.0640 also helping to buffer the downside.

GBP/USD

In the wake of the perception of a marginally dovish FOMC rate hike, it is the dollar that is now driving the moves on Cable, with a strong bull candle that added around 140 pips on the day. This turns the near term horizon into an improving outlook with the momentum indicators all ticking higher. The Stochastics look to be crossing higher, whilst the MACD lines are on the brink of a similar move. The move through $1.2250 completes a small base pattern on the hourly chart that suggests a conservative upside target of around $1.2360, which is interesting as I see this as a bear market rally. Bear market rallies tend to undershoot their recovery targets and there is considerable overhead supply from the key low posted throughout February between $1.2345/$1.2385, which is around where I would expect the next lower high to be formed. The hourly chart shows $1.2250 will be supportive in the near term for this mini recovery phase, with the overnight high at $1.2308 also now a resistance. I continue to favour a retest of the lows around $1.2000 in due course.

USD/JPY

Once more the range play between 111.60/115.60 is back in play. Yesterday’s dollar weakness from the FOMC meeting hit Dollar/Yen to the tune of over 130 pips of downside on the day. This clearly confirmed the broken uptrend and the corrective signals once more within the range. The momentum indicators have all rolled over with the Stochastics giving a sell signal and the MACD lines also crossing lower. There seems to be further downside likely within the range now. The hurly chart shows a decisive move back below the range pivot at 114.00 which will once more become a gauge for sentiment. Also closing below the previous key near term support at 113.55 means there is a likely “sell-zone” near term between 113.55/114.00 as any oversold momentum looks to unwind in the coming days. The next support is in the range 112.50/112.85 which is likely to be tested now.

Gold

Just as the recent uptrend on Dollar/Yen has been broken, the recent downtrend on gold has also been decisively broken following the dollar weakness induced gold rally. A sharp bull candle yesterday added $20 on the day and the move has continued today. It was interesting to see the market initially stalling around the $1220 old key level overnight, but that overhead supply has been decisively breached this morning. Technical indicators have turned the corner with the Stochastics rising and RSI back above 50. The price now needs to negotiate the next barrier which is the 23.6% Fibonacci retracement of the $1122/$1264 rally, at $1230. This move has certainly improved the near term outlook however this is a market that seems to be increasingly choppy across a medium term range and old pivot resistance around $1240 will be again a key area of resistance. The hourly chart shows a near term base completed above $1211 which implies around $17 of upside and means that the target of around $1228 is already within reach. Can the gold price continue to test the resistance? The old pivot around $1220 now becomes supportive near term, with $1211 as further breakout support.

WTI Oil

The market correction of around 8% over the past week was induced by last week’s EIA inventories, however the inventories yesterday shows a surprise drawdown in not only crude stocks, but also distillates and gasoline. This is supportive for oil and could now drive a technical rally. A decisive move above $48.90 has completed a small near term base pattern that would imply $1.75 of upside and a move back to test the old key level of $50. This would be into an area of overhead supply with a series of old key lows between December and February at $49.60/$51.20. The daily chart shows a near term Stochastics “buy signal” which should in this situation be treated with caution perhaps being a profit trigger for short positions, rather than an outright “buy signal”, at least until there is further confirmation. Support at $47.10 has been bolstered by the recent rebound, with $48.15 now a higher low.

Dow Jones Industrial Average

Are the bulls now ready to take control once more? The corrective drift of the past couple of weeks unwound the Dow from the all-time high at 21,169 back by less than 2% to last week’s low of 20,777. However the move has helped to correct the market back to its four month uptrend and allow the strongly configured momentum to unwind. A close above 20,940 which was a reaction high from late last week now suggests that the bulls are starting to resume their appetite for buying once more. The hourly chart shows the support building with the 20,777 and now 20,786 lows, whilst hourly momentum indicators have also turned more positive. The RSI and MACD lines are pushing into more positive configuration. If the bulls can hold above 20,870 which was the low just prior to the FOMC decision, then the outlook will continue to improve for a retest of next resistance at 21,118 and the all-time high at 21,165.


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