Dollar suffers under renewed pressure on Trump as safe havens benefit

Market Overview

The dollar is suffering once more as the political pressure on Donald Trump gets cranked up yet another notch, also helping to drive safe haven flow. There have been revelations that President Trump’s son had email contact with the Russians that had information that would help to discredit Hillary Clinton during the election. This has driven traders into more safe haven asset plays, with US Treasuries, gold and the Japanese yen all being bought. The selling pressure on the dollar has also driven the euro to its highest level against the greenback since May 2016. This also comes as a couple of FOMC speakers have perhaps not been as hawkish on rate hikes as the market had hoped. Lael Brainard, seen as being close to the thoughts of Fed hair Janet Yellen suggested that persistent low inflation could prevent further rate hikes, whilst another FOMC voter, Patrick Harker also expressed concerns over inflation. This all comes ahead of Fed chair Janet Yellen’s bi-annual testimony to Congress (she appears before the House of Representatives today). Traders will be looking for any hints or suggestions over the timing of the balance sheet reduction, in addition to the next rate hike, whilst inflation will also be a factor.

Dollar

Wall Street closed all but flat on the day with the S&P 500 -0.1% at 2425 as markets wait for Yellen. Asian markets were mixed to lower with the Nikkei -0.5%, whilst European markets are higher in the early moves. In forex the dollar weakness against the yen is the main theme, whilst interestingly, sterling is the big underperformer. For commodities, gold has bounced on the back of a weaker dollar, whilst oil has jumped over 1.5% this morning after last night’s API inventories showed a larger than expected crude inventory drawdown.

Traders will be looking ahead to Janet Yellen this afternoon, however that is not the only thing on the economic calendar today. UK unemployment is at 0930BST and is expected to stay at 4.6%. However the big attention will be given to Average Weekly Earnings growth which on an ex-bonus basis is expected to improve slightly to +1.9% (from +1.7%) and with inflation running close to 3%, there continues to be a squeeze on real wages which is negative for the UK economy. The Bank of Canada monetary policy announcement is at 1500BST. There have been increasingly hawkish signals from BoC Governor Poloz in recent weeks and there has been an increasing pricing of a rate hike in the coming months, but is this month just too soon? EIA Oil Inventories are at 1530BST and are likely to drive volatility in the oil price. Crude oil stocks are expected to fall by -3.2m barrels, whilst distillates are expected to rise by +2.0m barrels and gasoline stocks are expected to rise by +1.2m barrels.  Federal Reserve chair Yellen testifies to the House Financial Services Committee at 1500BST and markets will be looking for any hints over further rates hikes and further information on the speed of balance sheet reduction.

 

Chart of the Day – NZD/USD

We discussed the Kiwi a week ago, as the seven week uptrend was breached. However what looked to be a consolidation has turned into a corrective move with a strong bear candle that was posted yesterday. The decline also broke below the pivot of $0.7240 which had frequently been a turning point historically and had also held as support for last week’s low. This completed a small top pattern and implies around 105 pips initially to $0.7135. The market is now in retreat and is in line now to test the support band of the mid-June lows between $0.7170/$0.7195. The concern is that the momentum indicators which had already been rolling over are now in sharp deterioration. The RSI closed yesterday below 50 to a seven week low whilst the MACD lines are accelerating down and the Stochastics have just posted a “bear kiss” in their decline. This could all now open for a bigger correction. The support band $0.7170/$0.7195 is key to the near to medium term outlook. A breach of $0.7170 would open a retreat to the March/April/May pivot of $0.7050. The hourly chart shows negative configuration across the board and increasing selling pressure. Rallies should now be seen as a chance to sell and with 50/60 on the hourly RSI limiting the rebounds, today’s early rebound could give that opportunity. Ideally the resistance at $0.7240/$0.7280 will cap the resistance for the sellers to regain the initiative today.

EUR/USD

With the dollar coming under renewed pressure there has been another upside breakout on EUR/USD. The resistance that had been holding for the past couple of weeks at $1.1445 has been breached by a solid bull candle which added almost 70 pips yesterday and now brings the pair within touching distance of the $1.1500 implied target from the $1.1100/$1.1300 range breakout. Momentum remains strong with RSI, MACD and Stochastics lines all rising strongly. The RSI is around 68 now, so there is arguably limited scope for huge gains as 70 has historically been limiting, however the outlook certainly remains to buy into weakness, even if it is intraday weakness. The hourly chart shows that the breakout support around $1.1445 is a source of demand now, with a support band $1.1385/$1.1445 ready to catch any unwinding move now. The next key upside resistance is the May 2016 high of $1.1615.

GBP/USD

Cable is an interesting pair, as despite the renewed weakness on the dollar, sterling is an even weaker play. This has meant that another corrective negative candle was posted yesterday with a close towards the low of the session as the near term channel lower continues. A retreat towards the old medium term pivot of $1.2775 remains a likely move. This comes with momentum indicators continuing to slide, as the RSI and Stochastics track lower and the MACD lines also shape to form a bear cross. Rallies within this near term channel continue and yesterday’s high at $1.2927 could quite possibly now be a second lower high below $1.2982. Selling near term positions into strength is a profitable strategy for now and intraday gains are an opportunity. The hourly chart shows negative configuration across hourly momentum indicators with a resistance band $1.2890/$1.2927 now in place. Yesterday’s low at $1.2828 is initial support but the $1.2775 pivot beckons still.

USD/JPY

A reversal threatens now as the dollar bulls have seemingly lost their way. The uptrend that has been running higher since mid-June is being broken on an intraday basis this morning as the market has dropped in the Asian session. Previously throughout the bull move of the past few weeks, any bear candles have been limited to a handful of pips of downside. So it would be a key development and change in sentiment if a strong bear candle were to form. A close below the trend (currently at 113.60) would also be a big shift. Momentum indicators have been strong for a while now and are just beginning to tick lower but nothing yet that would be any decisive signal. The hourly chart shows a breach of the initial support around 113.70 and hourly momentum into a more corrective configuration. Resistance is also now building around 114.00. The support band 112.70/112.90 is key for the bulls. How the market closes tonight in the wake of Janet Yellen could be key for the near term outlook.

Gold

Yet another market to react to the weaker dollar is gold. I discussed yesterday the prospect of a bull hammer from Mondays candle, adding that far more confirmation was needed to trust it. Well, yesterday’s intraday rally to close at the day high is certainly adding a much more positive near term outlook. The downtrend of the past five weeks comes in today at $1230 and a technical rally could well be seen towards there. However I still see this as a bear market rally that is unlikely to last for too long. The initial resistance is last week’s mid-week rebound high at $1229 meaning that this is a key area to watch now. Momentum indicators have picked up but not in any sustainable fashion yet that would suggest this is the beginning of a bull recovery of any note. Look to use a rally that begins to fade under the downtrend for renewed downside pressure in due course. The hourly chart shows a pivot band $1215/$1217 as initially supportive but the $1204.50 support is key.

WTI Oil

In front of the weekly EIA inventories the market looks to have found support. The key May low at $43.75 has come in repeatedly to hold the intraday lows of late and have helped the bulls to build a foothold over the past three completed sessions. The long lower shadows of the candlesticks suggests the sellers are failing to convert initial strength, whilst it is interesting to see the candlesticks becoming progressively more positive, despite the consolidation. This move is also helping to steady the bearish momentum as the RSI and MACD lines begin to look more positive again, with the Stochastics turning up this morning. The early jump higher today now needs to build and leave a higher low above the $43.75 support which looks likely now. Subsequently the resistance around $44.90 has been breached, with a breakout implying a recovery of $1.25 higher which would bring the market back into range of the $46.53 high from Thursday last week. A close below $43.75 would though scupper the potential recovery.

Dow Jones Industrial Average

Yet more consolidation as the market looks ahead to Yellen and the key earnings announcements towards the end of the week. This is a consolidation that has a very mild positive drift developing but the market still remains rangebound within the 21,197/21,563 range. Momentum remains positive on RSI above 50 whilst the Stochastics are also holding up well above 50. However unless there is a close above near term resistance at 21,505 then it is very difficult to get too bullish about the recent moves. The hourly chart suggests this is a very neutral configuration near term with the hourly RSI oscillating between 30/70, once more reflecting a ranging market. Initial support at 21,370 and now yesterday’s brief spike low at 21,279.

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