The focus on US inflation took on added importance yesterday in the wake of a dovish set of FOMC minutes released last night which has hit the dollar once more. “Many” participants viewed the likelihood that inflation may remain below the 2% target for longer than currently expected. With inflation having fallen for much of 2017, and “some” on the FOMC believe the Fed needs to see traction in the direction towards target before pushing ahead with further rate hikes. The prospects of a December hike which would be the third in 2017 have taken a further hit. Treasury yields fell back with the US 2 year down by 3 basis points and the 10 year down by 6 basis points. The dollar rally that had been taking hold has subsequently started to reverse again. Markets such as Dollar/Yen and Gold have reacted strongly, whilst it was interesting to see to see equities also stuttering despite the prospect of less stringent tightening from the Fed.
Wall Street closed off its highs yesterday with the S&P 500 +0.1% at 2468, but Asian markets were mixed (Nikkei -0.1%) and European markets are cautious in early moves. In forex there is a mild continuation of the dollar weakness against the majors, with the yen outperforming. The Aussie is also a decent performer today after Australian unemployment dropped to 5.6% (from 5.7%). In commodity markets, gold has continued form yesterday’s late rally and is around $4 higher, whilst oil is around flat after a sell-off in the wake of the EIA inventories yesterday.
The run of key tier one UK economic data continues today with UK Retail Sales announced at 0930BST which are expected to drop back to +1.3% year on year ex-fuel. With inflation beginning to move into reverse it will be interesting to see how the UK consumer is being impacted. Hitting expectations would be the second lowest month since 2013. Final Eurozone CPI is at 1000BST which is expected to be confirmed at +1.3% headline, with core expected to be confirmed at +1.2%. The US data begins at 1330BST with the Philly Fed Business Index which is expected to drop slightly to +18.5 (form +19.5) with Weekly Jobless Claims again holding around recent levels at 140,000. US Industrial Production is at 1415BST and is expected to be +0.3% for the month, whilst Capacity Utilization is expected to improve marginally to 76.7% (from 76.6%). Finally FOMC voting member Robert Kaplan (mild dove) speaks at 1730BST.
Chart of the Day – DAX Xetra
The DAX is on the brink once more and the bulls have a big decision to make. Do they back the rally this time, or do they fold once more as they have done on several previous occasions around the pivot of the old June/July lows at 12,316? There have been a string of key intraday failures around the pivot meaning there is a key band of resistance 12,316/12,340 which is in range of today’s session should the bulls manage to regain control. Not only that, there is a downtrend that comes in from the mid-June all-time high which adds to the resistance almost bang on the pivot today. The strength of the recent recovery means that there has been a near term improvement in the momentum indicators, bringing them back to some key medium term levels. The RSI previously during May/June came back to support around 50, but since topping out, this has become an area where the bears resume control. The MACD lines have also only just started to tick higher, whilst the sensitive Stochastics are reflecting the strong rebound. This suggests that after four days of gains, the DAX is now back at a key crossroads. Is this near term rally going to fail around medium term resistance? “The trend is your friend” and the bulls have failed on so many previous occasions in the past few months, that it will take a significant effort to break this sequence today. It needs a close above 12,340 to suggest the bulls can re-engage once more with the move confirmed above 12,385. The next resistance is 12,575 with 12,676 now key. Another failure around 12,316 would be a big blow for the bulls. Initial support is at yesterday’s low at 12,240 with a move below 12,157 resuming the downside move.
The renewed dollar weakness has once more enabled the bulls to hang on to the breakout of the old key August 2015 high at $1.1711. This support has come under strain on four of the past six sessions and despite being breached (by 30 pips yesterday) it has never been broken on a closing basis. With the market ending with a positive close yesterday there is now a band of support that has been formed $1.1680/$1.1711. Although there have been further marginal gains today, the threat of a breach has not yet gone away and the bulls will now be looking to push back above the lower reaction high of $1.1845. This phase of trading over the past couple of weeks has turned into a consolidation and is one which looks to be a move to allow the bulls to recharge for the next push higher. Near term corrections remain a chance to buy.
The break below $1.2930 was a decisive near to medium term move that has put the pressure on for a test of $1.2775/$1.2808, around which I expect to see support starting to build. The question is whether the support in place at $1.2840 from yesterday’s low is that support. The reaction of the bulls to the FOMC minutes suggests that there could be some further weakness still . The move has not been decisive and the reaction around the resistance of the previous support at $1.2930 could now be key. Momentum indicators remain corrective and another lower high around $1.2930/$1.2950 is likely. It would need a break above $1.3030 to suggest the bulls are back in control. The hourly chart shows this is just an unwinding rally at the moment with RSI and MACD back to levels where the sellers have tended to resume control. The UK Retail Sales will drive volatility today but for now continue to sell into strength for a retest of yesterdays $1.2840 low.
Once more the dollar bulls have failed to grasp any sustainable control on the market and the rally has started to unwind. Coming with the resistance at 111.00 this only goes to strengthen the barrier that is building up overhead. A negative candle was completed yesterday in the wake of the dovish FOMC minutes and the decline has continued into today’s early move. The hourly chart shows support at 110.20 was breached overnight and now the pivot at 109.80 is creaking under the pressure. Hourly momentum has flipped negative and now looks to be a market that is choppy at best but if the RSI begins to fail around 50 then the bears could be taking control again. This would be seen on a move back below 109.40 near term support which would then re-open the lows again of 108.73. The previous near term support at 110.20 now becomes resistance again as the sentiment on the market has changed.
The move on gold in the past 24 hours just shows how important the outlook for the dollar is to gold. The safe haven flow has dissipated but the market has rebounded significantly as the dovish FOMC hit the dollar into the close last night and the move has continued today. Technically, the support of the five week uptrend has remained intact and the momentum indicators which were threatening to post corrective signals have hung on to their positive configurations. A strong bull candle closed with $11 of gains towards the high of the session and leaves a candle that could now propel the market to the $1296 highs. First resistance to be negotiated is the $1291.90 high from last week. It will be interesting to see if the bulls can follow through on this one as the trend in place will give some confidence. However I remain an advocate that this is a medium term range play and the rally will begin to fail around $1300. The hourly chart shows a band of support $1274/$1281 and a move back below $1274 would be a signal that the bulls are losing their way again.
Even though crude oil stocks had a larger than expected drawdown, the mixed EIA oil inventories ended up being a drag on the price and another negative candle was formed. This confirms the breakdown of an 8 week uptrend but also closing below $47.00 is a key development too. This $47.00 level has been a key medium term pivot and also the 50% Fibonacci of the $52.00/$42.05 sell-off. Along with the increasingly corrective momentum indicators, this confirms that rallies are now a chance to sell. The next reaction low at $45.40 is now open. Initial resistance is at yesterday’s high at $48.00 meaning between $47/$48 is now a near term “sell zone”.
Dow Jones Industrial Average
After an uncertain previous session the Dow continued its move higher yesterday but once more under the guise of a rather uncertain bulls rebound. Although there is a succession of higher lows and higher highs over the past few sessions, the market closed towards the low of the session and momentum is not decisively positive. Daily momentum indicators are moving sideways with this rebound rather than confirming with a rise. This leads to a cautious buy strategy. Yesterday’s high at 22,086 has added importance as if the bulls begin to fail to post higher highs then once more the bulls could begin to question the rebound. Despite this though, there is a suggestion that with the market above 22,000 again it is preparing to move back to test the all-time high of 22,179 again. The hourly chart shows support now in place between 21,971/22,039.