Dollar under renewed pressure as Yellen expresses concerns over inflation

Market Overview

The US dollar has been put under renewed pressure as Janet Yellen appeared to be less hawkish than the market had been anticipating. In her prepared statement before the House Financial Services Committee suggested that there were concerns over inflation in the US potentially not simply being transitory and that if they persist, it could impact on the pace of Fed tightening. Treasury yields fell sharply on this whilst the dollar also felt the selling pressure. The dollar weakness and improvement in the outlook for Treasuries, the yen and gold has been significant. The dovish assessment of Yellen’s testimony has also bolstered equities which rallied sharply yesterday. Risk sentiment has been improved this morning by the China Trade Balance which showed signs of strength again with an increase in the surplus to $42.8bn ($42.4bn exp). Both imports and exports beat expectations, with import growth of 17.2% (+13.1% exp) again up from +14.8% last month, whilst the exports growth of 11.3% (+8.7% exp) was also higher than the +8.7% last month.

Dollar bear

Wall Street closed strongly higher last night in the wake of the Yellen testimony, with the S&P 500 +0.7% at 2443. Asian markets were a touch more cautious with the Nikkei around flat, whilst European markets are all but unchanged. Forex markets show the dollar under pressure across the majors, with the commodity currencies performing well after the Bank of Canada joined the US in starting to raise rates yesterday. In commodities, gold is again holding higher, whilst oil is marginally weaker in the early moves.

Traders have a relatively quiet morning in the European session but the US data looks at factory gate inflation. The US PPI is announced at 1330BST with an expectation that year on year headline PPI will drop to +1.9% (from 2.4% last month), whilst the core PPI is expected to drop slightly less to +2.0% (from +2.1%). The Weekly Jobless Claims are at 1330BST which are expected o once more stay around recent levels with 245,000 jobs (last month 248,000).

 

Chart of the Day – EUR/JPY

Is this the end of a big run higher on EUR/JPY? The first seriously corrective candlestick for over three weeks has left resistance at an 18 month high of 130.75. The size of the bear candle (over 160 pips) has now already reversed the gains of the previous three sessions. The fact also that the candlestick was solidly bearish (opening around the high and closing around the low) will add to pressure. There is also a notable tick lower on the momentum indicators, with the RSI sharply crossing back below 70 (a basic sell signal), whilst the Stochastics have also crossed lower. The market has effectively been in an uptrend channel for the past few weeks, the support of which is interestingly around the first key reaction low of 127.97. However , the next session reaction to such a strong bear move can be very important and there is a degree of support that has already started to form, interestingly around the previous breakout at 129.00 (shown best on the hourly chart). Another negative candle today would confirm the move and heap on downside pressure for a retreat to test the support around 128.00. This will be the test of how deep the correction goes now.

EUR/USD

Corrections on the euro remain a chance to buy. The euro has been trending higher since early April and with momentum positively configured there is a strong run of higher lows. The market hit the highest level since May 2016 yesterday but subsequently reversed to leave a high at $1.1489. This was just under the $1.1500 target area of the May to June range breakout.  Despite this negative candle and market retreat, this is likely to be seen as a buying opportunity. The uptrend comes in at $1.1290 which still leaves some room to unwind but there is a  support at $1.1380 from Monday’s low which is again building built from. The hourly chart shows momentum again picking up from levels where the buyers have previously bought into, whilst also renewing upside potential. The support band $1.1280/$1.1290 is growing. Expect a retest of the recent $1.1489 high in due course.

GBP/USD

Cable has been in a near term corrective trend channel now for the past two weeks, tracking lower highs and lower lows. The rallies within this channel have been sold into but with the latest rally from yesterday’s positive candle is this another opportunity presenting itself? Maybe not. The resistance band between $1.2890/$1.2927 is seemingly being broken and this has been a key barrier for the continuation of this correction. The momentum indicators are medium term corrective but are also back towards levels where the buyers could be interested again. This suggests that the near term correction is still likely to be supported within the range at some stage. I have been expecting a retreat to the $1.2775 mid-range pivot, but yesterday’s low was $1.2808. This means that the low could be close and could have even already been posted. The reaction at the resistance band $1.2890/$1.2775 could be key to this and holding an upside break today would re-open $1.2982.

USD/JPY

There is a corrective pressure taking over Dollar/Yen now and the band of support 112.70/112.90is key to the near term outlook. The four week uptrend was broken by a strong bear candle, a move that is being held by additional weakness today. Furthermore, the momentum indicators are increasingly corrective with the RSI below 60, the MACD lines threatening a bear cross and the Stochastics looking set to confirm a sell signal. However traders will be watching the support band 112.70/112.90 with intent as this was the previous consolidation that was bought into and a failure of the support would be confirmation of an ongoing correction. The hourly chart shows initial resistance now in at 113.70 and then 114.00.

Gold

Gold is in recovery mode as a third positive candle was posted yesterday. However there are still questions over the longevity of this move. The resistance of the five week downtrend continues to loom overhead (currently around $1227) whilst the minor reaction high comes in at $1229 as the first main reaction high. The momentum indicators are starting to improve but yesterday’s candle was a touch lacklustre and the bulls need to reassert again today. The early move is higher but until the resistance of the downtrend and at $1229 is breached the confidence in the recovery will be limited. The hourly chart shows improving near term momentum and a move back above yesterday’s high of $1225.50 would be a sign of positive intent today. Support is at $1214 which was the low yesterday just prior to Yellen’s testimony statement.

WTI Oil

The improvement seen in oil over recent sessions should be supported by the decline in the oil inventories of both the API and EIA this week. However, a strong move higher has been subjected to significant intraday volatility in the past few days, especially culminating in the somewhat disappointing daily candlestick from yesterday. Despite this though the recovery in the oil price has helped to bolster the support around $43.75. The recovery has also helped to stabilise momentum indicators once more. This remains a choppy trading phase for oil and an early dip today is not helping the mixed sentiment following yesterday’s candlestick. The resistance around $46.50 has also been strengthened by the intraday retreat as shown by the big bearish engulfing one hour candle on the hourly chart. A loss of the initial support band $44.90/$45.00 would begin to increase the bear pressure once more.

Dow Jones Industrial Average

With equity markets pushing strongly higher on the back of a less hawkish than expected testimony from Janet Yellen, the Dow has looked to break out from the recent range. The strong bullish candle and intraday breakout suggests that the bulls are back in the driving seat with a new closing all-time high of 21,532. However, the bulls could not hang on to the breakout and the market has pulled back from a new intraday high of 21,581 to close once more back within the range. Daily momentum indicators are ticking higher again from positions of strength on a medium term basis and this helps to suggest that corrections are now a chance to buy. There is now initial support around 21,500 with yesterday’s traded low at 21,467 whilst there is further gap support around 21,445.

 


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