The dollar has just pared some of its recent gains today as traders prepare for a crucial monetary policy meeting of the FOMC which should conclude tonight with a hike of 25 basis points. The dollar has retraced a little this morning after seeming to strongly price in a rate hike in the last few days. However, this looks to simply be a pause for breath as gold and the yen continue to track sideways, as does Wall Street. The two year yield has settled just under last week’s multi-year high of 1.388% whilst the 10 year yield is steady around 2.60% and remains under the key resistance at 2.64%. The Fed Funds futures are pricing a 91% probability of a hike, but the real interest will be seen in how the Fed looks ahead. A “hawkish hike” would be 25 basis points plus a tightening of the dot plots to suggest perhaps even four hikes this year, whilst also extending inflation and growth projections. This would drive Treasury yields higher, along with the dollar, whilst negatively hitting key safe havens such as gold and the yen and also likely to drive some profit taking on equities. A “dovish hike” would be 25 basis points with little change to the dot plots or inflation projections. My feeling is that the Fed sit somewhere in the middle, not wanting to drive too much strength through the US dollar and will hold a steady course with little need to alter too much. Inflation trends have improved since December, so there will likely be an increase there, but I think that three hikes is adequate this year and would give the Fed wriggle room for the coming months.
Wall Street drifted back a little further overnight with the S&P 500 -0.3% at 2365, whilst Asian markets were also mildly lower (Nikkei -0.2%). European markets are steady in early moves. In forex, the dollar is looking a touch corrective across the majors. The biggest outperformer is sterling, whose volatility has increased over recent days with Brexit and a new Scottish independence referendum driving 1 month implied volatility on GBP/USD higher. There is no significant newsflow behind the move on sterling today. Gold and silver are supported, with gold back above $1200, whilst oil is higher on the unexpected inventories drawdown on the API oil stocks.
It is Fed day, however prior to that there is a clutch of key data that markets will also be paying attention to. The UK employment data is at 0930GMT with the headline unemployment expected to stay at 4.8% with a claimant count of -5,000. However, more attention will be paid to the average weekly earnings data which is expected to show ex-bonus year on year earnings to dip slightly to +2.5% (from +2.6%). The US CPI inflation data is at 1230GMT with headline CPI expected to increase to +2.7% (from +2.5%) whilst the core CPI is expected to dip back slightly to +2.2% (from +2.3%). US Retail Sales are also at 1230GMT which are expected to show ex-autos flat (0.0%) growth on the month (last +0.7%) which would maintain the strong year on year growth at just above 4.5%. However the main focus for the session will be on the Federal Reserve which announces monetary policy and economic projections at 1800GMT with Janet Yellen’s press conference at 1830GMT.
Chart of the Day – GBP/JPY
“The trend is your friend… until it ends” is the full version of the old technical adage, and this seems to be something to bear in mind with the corrective move on Sterling/Yen. Since the rally peaked in December, the market continues to be dragged lower by a very well defined downtrend, but this is coming under pressure now on a consistent basis recently. The latest rebound within the downtrend has failed for the past three days around 140.50 and is again being tested after an early rebound today. Momentum indicators retain a negative configuration with the RSI again failing under 50, the MACD lines consistently below neutral and Stochastics again crossing lower. With the trend your friend, rallies remain a chance to sell. However, the market seems to be on a knife edge now around the 140.50 resistance which has again been tested this morning. A decisive close above resistance at 140.75 would seriously question the trend and improve the outlook with a small base completion. Initial support is now at 139.13 from yesterday’s low will be seen as key to a recovery and a breach would open the 138.40 support which is the last level before a move to the key January low at 136.43. With the market so balanced moving into a clutch of key events, the resistance at 142.00 would be key.
Over the course of the past few weeks, the euro has formed a trading band between the support at $1.0490 and the resistance around $1.0710. The latest two completed candles have been corrective once more and pulled the market lower to again neutralise the outlook. This near to medium term consolidation is increasingly being reflected in the momentum indicators which are settling around neutral with the RSI flat just above 50, the MACD lines flattening just below neutral and the Stochastics also benign. The market is looking towards the Fed to drive direction now as the support has formed overnight around $1.0600. The hourly chart shows a very near term pivot around $1.0640 with initial resistance for very short term traders at $1.0660 but it would be a surprise to find any significant direction in front of the Fed at 1800GMT tonight. A decisive move outside this band of 220 pips would be directional now.
The volatility has been ramping up in the past few days with a raft of key newsflow (potential Article 50, Scottish Referendum chat) and fundamental (FOMC and Bank of England) events ramping up. Technically the market is becoming increasingly choppy. What had previously been a relatively serene drift lower is becoming harder to read. The market looked to be continuing lower yesterday as the pair dropped to a new multi week low, however a rebound from $1.2105 has quickly unwound 150 pips to this morning’s high around $1.2255. A bottoming of the corrective momentum indicators is beginning to be a real prospect now with the RSI picking back up above 40, and the Stochastics beginning to track higher. However this could be a very cautious recovery, which needs a lot of convincing. The hourly chart shows a pivot around $1.2250 so it is interesting that the spike rally this morning has turned lower at $1.2255. There is near term support between $1.2140/$1.2170 but this is a market to stay close to the newsflow for now too.
The pair has moved into consolidation mode in front of the Fed. The last four closing levels have all been within 20 pips of each other, with the candlestick ranges increasingly tight and candlestick bodies increasingly small. Momentum indicators have flattened and there is little near term direction. The hourly chart shows support building above 114.25/114.45 whilst resistance around the top of the medium term range at 115.50/115.60 is growing. The daily chart shows the recent uptrend has now been broken by the consolidation. The Fed tonight and Bank of Japan tomorrow means there could be a great deal of volatility and direction, but for now we wait.
Just as with Dollar/Yen, the market has been consolidating over the past few sessions. The trend that has been pulling gold lower is now coming under threat of being breached as the market continues to move sideways. A mixed run of candles seems to have halted the decline for now but the market is looking for direction, something that the Fed could hopefully induce. For now the market has settled into a small range $1194.50 to $1211.20 with both daily and hourly momentum increasingly benign and lacking real direction. A hawkish Fed would be a drag on gold and likely break below $1194.50 which would open the key support at $1180. The key resistance comes in with the overhead supply around $1220.
Monday’s consolidation move seems to have just been little more than a day of respite as the selling pressure resumed yesterday. The market has remained under pressure since its breakdown below $50 last week and the November low at $44.82 is now coming into view. Momentum indicators are negatively configured now rallies will be seen as a chance to sell. That means that the early bounce today could provide an opportunity. The hourly chart shows old support is consistently being seen as a basis of new resistance for intraday rallies. This is reflected in the resistance forming between $48.50/$48.80 which again seems to be limiting this morning. Yesterday’s low at $47.10 is initially supportive but there is little reason not to see further downside in due course.
Dow Jones Industrial Average
The corrective drift back within the four month uptrend continues, with the trend today coming in at 20,760. The move is helping to unwind momentum indicators and the fact that the selling pressure has not been greater during the correction suggests there is a lack of real desire to sell the market. It will be interesting to see how the market reacts following the Fed tonight as this is likely to drive direction for the coming days. Another tight range with a small body on the candlestick reflects the market uncertainty going into the FOMC. Although the market has now put together nine straight negative candles, this still has a look of a correction within a bull trend and going into the meeting, the correction will be viewed as likely to be a chance to buy. Initial support is between 20,734/20,777 with resistance now at 20,940.