The recent strong run of yields higher and dollar strength has just taken a pause for breath this morning, but is it a turning point? For a while there has been a broad consensus in the market for longer term dollar weakness. However the sharp move higher in Treasury yields over the past few sessions has driven a sharp dollar rally in a move that is reverberating throughout financial markets. The US 10 year Treasury yield came within a hair’s breadth of hitting the psychological 3% level yesterday (with an intraday high of 2.998%). This has helped to propel the dollar through some key levels and trends on major pairs, whilst the Dollar Index has now decisively broken a crucial long term downtrend. However, despite this notable recovery on the dollar, there are some significant technical levels that remain in place and need to be broken to suggest this move is one that has legs. for now this it may be a bit too early to put the dollar weakness argument to bed quite yet. How the US 10 year yield reacts to 3% will be crucial, and initially the market has backed away, falling to 2.96% this morning. The dollar has dropped back a touch too today. This sharp move higher on Treasury yields has also pulled equities back but once more as the dollar move seems to be taking a pause for breath this morning, this is reflected across the indices. There is a sense that this is a crossroads moment for the dollar, and traders across the markets are waiting to see if the greenback rally has simply been short covering or something else more sustainable.
Wall Street closed all but flat last night with the S&P 500 just 0.1 tick higher at 2670, but with Wall Street futures around 0.2% higher, this is helping Asian markets to bounce (Nikkei +0.9%) whilst European markets are also cautiously higher. In forex, the consolidation on euro and sterling is small change so far, but the Kiwi remains under significant pressure. The Aussie is showing little reaction to Australian CPI which slightly missed estimates overnight at +0.4% for Q1 (+0.5% for the quarter exp, +0.6% last). In commodities, the slight dollar slip has allowed gold to tick higher, whilst oil is back in the groove of bull control.
There are a number of lower tier data points to look out for today. The German Ifo Business Climate for April is at 0900BST and is expected to continue the trend of recent months and drop sharply to 102.7 (from 114.7 last month) which would be the lowest reading since December 2012. UK public sector net borrowing for March is at 0930BST and is expected to show a deficit of £1.1bn but this would be an improvement on the £2.3bn deficit for March 2017. There is also a clutch of US data with the US Conference Board’s Consumer Confidence the most important at 1500BST with expectation of a slip to a still incredibly strong 126.0 (from 127.7 last month). The New Home Sales at 1500BST are expected to improve to 625,000 (from 618,000) whilst the Richmond Fed Manufacturing is at 1500BST and is expected to improve marginally to 16 (from 15 last month). Today is also ANZAC Day today for the New Zealand and Australia.
Chart of the Day – EUR/JPY
Despite the recent consolidation, Euro/Yen is hanging on to the improving outlook that has come with the breakout above the old 132 pivot. Having closed decisively clear of the pivot a couple of weeks ago the market has effectively been consolidating. Friday’s slip back to the uptrend that has formed over the past four weeks was bought into yesterday, with the low leaving growing support around 132.00, also at the uptrend. The inference is that this is a consolidation, but the bulls need to step back into the driving seat to prevent the consolidation from looking tired. The RSI and Stochastics are both in positive configuration and the MACD lines too, but in the sideways move of the past two weeks, the impetus is threatening to drain out of the market. The positive reaction at 132.00 yesterday is encouraging and the market needs to hold above support at 131.80 to prevent a higher low support being broken. Resistance at 133.05 from last week’s high will be in mind as the bulls look to regenerate momentum now. Watch for the RSI on the hourly chart moving above 70 to suggest growing momentum and a move that could imply pressure on resistance again. Above 133.05 opens 133.80. There is initial support around 132.40 which has been a historic breakout hat has become a basis of a near term pivot.
Having positioned for much of last week with a positive bias, EUR/USD is suddenly facing the prospect of testing the key floor of $1.2155 which has been supportive of the three month trading range. The market has accelerated lower with two consecutive sharp bear candles and the market is now standing at a key crossroads. A confirmed closing break below $1.2155 would complete a large range breakdown and a top pattern which would imply 400 pips of further correction in the coming months. The reaction early this morning has been supportive, with a drop to $1.2183 which has been bought into, however the pressure of momentum remains on. With Stochastics and MACD lines falling, the RSI is at its lowest since November. The bulls have got a big session or two ahead to prevent a key breakdown. The hourly chart shows negative configuration and the reaction to the mini early rebound today could be telling of the sentiment in the market. There is initial resistance $1.2250/$1.2300 now and this needs to be overcome for the bulls to have realistic hopes of surviving this onslaught. Below $1.2155 the next support is $1.2090.
With five strong decisive negative candles in a row, the medium term outlook has completely shifted. The dollar strength and weakness of sterling has now broken a five month uptrend and the support at $1.3965. This has now re-opened what is a massive medium term support at $1.3710. Breaking the medium term uptrend in the way the market has now opens the long term uptrend which currently comes in around $1.3730, and the bulls will now need to work hard to prevent the retreat from testing it. This is a move that can still be contained and is still just corrective, however the RSI needs to hold up above 40 and MACD lines above neutral. There is now resistance between $1.3965/$1.4000 which is old support but now is a source of overhead supply. To re-engage the bulls though, a move above $1.4100 would be needed.
After two weeks of consolidation and testing the waters of a breakout but without the confidence to make the move, the bulls finally saw a decisive break yesterday. A sharp bullish candle has taken the market through the resistance band 107.50/107.90 and signals a shift in sentiment now. The improvement in momentum seen with the RSI pushing into the mid-60s, MACD lines accelerating into positive configuration and Stochastics also strong, suggests that there is also upside potential in the breakout. The market has quickly moved into the resistance band 108.30/110.50. The run of higher lows and higher highs suggests that the corrections are also a chance to buy, with the breakout support now 107.90/108.30 looking like a strong buy zone. The hourly chart shows a slightly stretched position coming into today’s session, however the bulls are likely to be eager to taken any opportunity on an unwind that comes their way.
A third consecutive strongly negative candle has now entirely unwound the gains of the past couple of weeks, bringing the market back to the support that has been a floor throughout April at $1321. So far though, looking at the wider context of how the dollar strength has played out across markets, the gold chart has held up relatively well. With the support at $1321 holding up and the market ticking higher this morning, the gold bulls have remained fairly steadfast. The momentum indicators have deteriorated near term, but not done any real damage to the medium term ranging outlook. It will be interesting to see how the market reacts to this building of support at $1321 which is a mid-range level that protects the real support of recent months between $1300/$1310. There is though overhead resistance built between $1331/$1340, whilst how the market reacts to what is essentially just an unwinding rally on the hourly chart could be key to the near to medium term outlook.
An incredible mid-session turnaround has seen oil rebounding sharply to close higher on the day but also shows the resilience of the bulls. The move is similar to the one seen last week where the market looked to be setting up for a correction, only for the move to be bought into at $65.55. This time the support has formed within the breakout support band $66.65/$67.75 which now bolsters this as key near term underlying demand. A move above $69.55 would put WTI once more at multi-year highs bringing the psychological $70 back into focus. Momentum indicators remain strong and suggest that any weakness remains a chance to buy. The hourly chart shows the support is now at yesterday’s low of $67.15 and configuration remains positive.
Dow Jones Industrial Average
A relatively quiet consolidation session does little to suggest the bulls are ready to jump back into the driving seat again. There is an increasingly worrying look to the momentum indicators which are rolling over, with the MACD lines around neutral but more pertinently, the Stochastics having posted a bear cross (not yet confirmed). The market is also now looking to trade below the old 24,450/24,650 pivot band support, whilst also having broken the recovery uptrend on Friday, a (very nascent) downtrend may be starting to form. The hourly chart shows the support to watch is a higher reaction low at 24,244 which if broken would change the outlook more corrective. Hourly momentum indicators are slipping into a more neutral configuration at best now with the threat of a move below 30 on the hourly RSI which would increase the downside pressure. A move back above 24,650 would improve the outlook again.
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