Dollar stronger after the FOMC but will it continue?

Market Overview

The dollar is stronger again in the wake of the Fed monetary policy last night, but can the move continue? In an FOMC statement that changed relatively little from the March meeting, the Fed did suggest that it felt that the recent slowdown in economic growth that led to GDP underwhelming in Q1 was simply “transitory” and that the fundamentals underpinning the growth in consumption remained solid. Treasury yields pushed higher, with the 10 year yield back above 2.300% and the interest rate sensitive 2 year yield back above 1.300%. The trade weighted dollar has looked to find support above its long term uptrend, with the greenback making continued key gains against the more safer haven plays such as the yen and gold.  Equity markets have had a mixed response to the moves.

Fed statement

Despite this, Wall Street closed mixed last night, with the Dow helped higher by the banks, whilst the S&P 500 (-0.1% at 2388) and the NASDAQ both closing lower. Asian markets were broadly weaker overnight, with Japan on public holiday, whilst European markets are mildly positive today. The final French Presidential debate before Sunday’s second round run off saw poll leader Emmanuel Macron seemingly consolidating his lead over Marin Le Pen with a solid performance. In forex markets there has been a degree of consolidation overnight and it will be interesting to see if the dollar bulls can continue their momentum. If Treasury yields continue higher then the dollar could regain bull traction. Gold is slightly lower again after yesterday’s losses, whilst WTI oil continues to bear down on $47.00 key support.

The services PMIs for the European countries are in focus today. The Eurozone countries dominate the early part of the session, with the Eurozone services PMI at 0900BST which is expected to show a mild upward revision to 56.3 (from the flash reading of 56.2) whilst the Eurozone Composite PMI is expected to be 56.7. Then the attention will be with UK Services PMI at 0930BST which is expected to drop back slightly to 54.6 from last month’s 55.0.  Weekly Jobless Claims are at 1330BST and are expected to improve to 246,000 (from 257,000 last week). US Factory Orders are at 1500BST and are expected to rise by +0.4% on the month which would be a fourth consecutive month of gains and would sustain the year on year growth at close to three year highs. European Central Bank President Mario Draghi is due to speak at 1730BST in Switzerland. Japan is on public holiday now until next week.

 

Chart of the Day – FTSE 100

The outlook for FTSE 100 is nowhere near as positive as it is for the major Eurozone markets. The index has been struggling since the announcement to call the UK election drove the strong bear candle in mid-April. An attempted recovery since then, with a strong bull candle (as markets reacted to the first round of voting in the French Presidential election) seems to be running low on fuel as the market has struggled around the resistance of an old top neckline around 7255. Posting resistance at 7302 last week, this could become another lower high, under 7406 and the all-time high at 7447. Having broken a 10 month uptrend, the market seems to be more corrective. The momentum indicators are falling over at lower levels now, with the RSI struggling in the 50/55 area and the MACD lines look more negatively configured. The 55 hour moving average had been rising and providing support through February and March but is now a basis of resistance at 7306. The market has opened positively this morning in the wake of the FOMC last night and Macron deemed to have done better in the final debate, however how FTSE responds to resistance between 7255/7307 will be key for the near to medium term outlook. The near term support at 7197 will become key now and a failure would re-open the key support around 7100. For the medium to longer term outlook, the support around 7100 is now key and could become a huge head and shoulders top pattern.

EUR/USD

The pair continues to trade in the tight 100 pip range that has been consolidating for the past eight sessions now. The dollar strengthened slightly in the wake of the FOMC announcement last night which completed a solid negative candle, however the market is still no close to driving direction out of the consolidation. This morning’s reaction has been to unwind some of the decline into the close last night and it would need another solid bear candle to suggest that the market was gaining potential traction for a move. Daily momentum indicators remain positively configured, even if they also reflect the consolidation. The hourly chart shows little real indication of direction, with the hourly momentum indicators seemingly oscillating around their neutral points with the hourly RSI between 30/70. Initial support at $1.0880 protects $1.0850, with yesterday’s intraday high on the FOMC at $1.0925 acting as resistance protecting $1.0950.

GBP/USD

Another solid negative candle is now questioning the near term run higher. The second consecutive daily low at $1.2860 was seen yesterday and with the slightly dollar positive result from the FOMC, there is continued pressure on this support today. The daily chart shows that the run higher has lost impetus with the RSI pulling back from 70, the Stochastics rolling over and the MACD lines now close to a bear cross. A retreat to $1.2775 should not be ruled out. The potential for this to be a near term top pattern is shown more clearly on the hourly chart and this will be a key focus of trading today. A decisive breach of $1.2960 would imply around 90/100 pips of further correction which would take Cable right back to the $1.2775 key breakout. However, the bulls have so far held on to the support and the pattern is not complete until the $1.2860 is broken. There is a near term pivot around $1.2900 which will be seen as near term resistance for a recovery.

USD/JPY

The flight out of the yen continues apace as Dollar/Yen confirms a key medium term upside break. The decisive close above the resistance at 112.20 has changed the outlook. On a near term basis the outlook is bullish and now medium term is at least neutral. This confirms the pair trading back in the old 400 pip band between 111.60/115.60. Momentum indicators confirm the improvement too, with RSI pushing towards 70 now, Stochastics strongly configured and MACD lines accelerating higher. The next resistance is only minor around 113.55 and with the strength of the move there is little to suggest this rally cannot continue. The hourly chart shows breakout support 112.20/112.30 now, whilst the lows of the past couple of days at 111.95 add to support. Corrections are being seen as a chance to buy.

Gold

Gold is under increasing pressure. Having broken below the support at $1261 the market has quickly fallen back to now breach the next support around $1240. The magnitude of yesterday’s bear candle reflects how much pressure the bears are under now. So much so, that the decline has now broken an uptrend that dates back to the key December low. A failure to quickly reclaim the support of the late March lows at $1239.50 would drive expectation of continued retracement to test $1200 again and possibly the March low at $1194.50. The momentum indicators are increasingly corrective with the MACD lines accelerating lower and the RSI now back to levels not seen since the March low. The overhead supply is increasing, with a pivot around $1252 protecting the key resistance at $1261. The hourly chart shows that overnight moves are struggling around $1240.  An old pivot around $1220 is next support below yesterday’s low of $1236.

WTI Oil

Another mixed set of EIA inventories but the crude oil drawdown was less than expected and the market remains under pressure. A continued decline back to test the $47.00 key March low remains on. However not only that, the trend channel support of a line of higher lows since March 2016 is also being seriously tested (currently at $47.35). Momentum indicators remain corrective and intraday rallies continue to be sold into. It is noticeable that on almost a daily basis, the US traders will come in and sell off any early morning gains. Old support continues to be seen as new resistance, with $48.20 initial resistance now. There is further resistance at $49.30, $49.60 and $50.20. Initial support is at yesterday’s low of $47.30, but below $47.00 opens the support at $44.80.

Dow Jones Industrial Average

Are the bulls getting ready to take over again. Yesterday saw the first time in five sessions that the market had broken above a previous day high and also posted a positive candle of any real note. This comes as the support of the old breakout of 20,887 remains intact. The momentum indicators remain positively configured and despite the recent drift lower on the price, momentum has held up well. This is still being seen as a minor unwinding move that is will help renew upside potential. A support band 20,777/20,887 remains the ideal “buy zone”, but the bulls could be ready. A close back above 21,000 would suggest they are moving back in. The hourly chart shows how the momentum has unwound and is looking to improve again as the neutral configuration for the RSI and MACD lines has settled. Resistance is initially 20,977 with 21,005 protecting the recent high at 21,070.


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