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Euro strength post ECB driving sharp Dollar weakness


Market Overview

The euro has strengthened with the dollar under huge pressure after ECB monetary policy and Treasury yields fall sharply. The market has been building towards the ECB meeting throughout this week, but the bullish intent on the euro has always remained. Even though ECB President Draghi tried his best (again) not to strengthen the euro, the appetite of the bulls could not be satiated. The Governing Council will decide what to do with its QE program in October but with only a mild downward revision to 2018/2019 inflation projections, the bulls have run again, to send the euro for a close above $1.2000 for the first time since January 2015.  Theoretically with German Bund yields falling, perhaps expectation might have been that the euro would have fallen on the news. However US yields were hit even harder meaning that the yield spread narrowed to maintain the correlation with the euro that has pushed EUR/USD strongly higher throughout this year. Hit also with a safe haven demand from the concern over the impact of the hurricanes, the US 10 year yield is now flirting with a move below 2.00% which would be a major psychological breakdown. The dollar has subsequently been smashed early today as a raft of key technical support levels have been broken on key major markets. EUR/USD, USD/JPY and even the commodity currencies are all making strong move against the dollar. The China Trade Balance fell to $42.0bn (+$48.6bn exp, +$46.7bn last month), but the demand for imports beating expectations at +13.3% (+10.0%, +11.0% last month) has helped to drive the Kiwi and the Aussie higher today. China exports slightly missed at +5.5% (+6.0% exp, +7.2% last month).

Torn dollar

Wall Street closed flat to marginally lower with the S&P 500  less than a tick lower at 2465. Asian markets were lower overnight (Nikkei 0.6%) with European markets mixed to cautiously lower this morning. In forex, the dollar is weaker across the majors, with the Aussie and Kiwi the standout performers on the China data. Gold continues to make ground with oil flat to slightly higher again.

It is a relatively quiet end to the week, with UK Industrial Production the only significant data release at 0930BST. The consensus expects the year on year industrial output to improve marginally to +0.4% (from +0.3%).  The market will also be looking out for comments from the FOMC’s Patrick Harker who is one of the more notably hawkish members and also a voter in 2016.

 

Chart of the Day – NZD/USD 

I focused on the Kiwi earlier this week on the break below $0.7200, however, this decisive dollar weakness seen throughout this week has completely changed the outlook. The pair has been under selling pressure, stuck in a downtrend for the past six weeks, however the bulls have made a key move  this morning. The pressure on the downtrend has been growing throughout this week with a break above $0.7200, but the overnight move has now completed a not only a break above $0.7263, but also the first key reaction high within the downtrend has been breached at $0.7298. This move has been accompanied by strongly improving momentum now, with the Stochastics rising at a four week high and the MACD lines completing a bull cross today, whilst the RSI is above 50 with a five week high suggesting the bulls have finally got traction in a recovery. Yesterday’s bull candle has left a higher low at $0.7170 which will now be seen as a key low. A close above $0.7300 would be confirmation but look for a buying opportunity on support between $0.7263/$0.7300. The breakout has opened key resistance at $0.7345 and if the bulls can breach that they really will be away.

 

EUR/USD

The ECB meeting has induced the latest bout of strength to EUR/USD, with a breakout to further new two and a half year highs. A strong bullish candle wit a close above the psychological $1.2000 was a key move yesterday, whilst the move has been followed today by further gains through the recent resistance at $1.2069 as the bulls continue to push. Momentum indicators are very strong but also shows further upside potential with the RSI at 70, the MACD lines having only just crossed higher and Stochastics with room to run. Another strong close today, especially above $1.2069 would really open the upside. There is no real resistance until $1.2245 which was a very old reaction low from December 2014, whilst it is interesting to see the upper limit of the current trend channel comes in today at $1.2210.  The hourly chart suggests buying into weakness with initial support around the psychological $1.2000 level at $1.2015 and $1.1985.

 

GBP/USD

The dollar is being hit across the majors and despite the perception of sterling woes on Brexit, Cable is no different. A strong of positive candles has been put together now and the market is now trading well clear of the old resistance $1.3000/$1.3050. Yesterday’s close above $1.3100 has now realistically re-opened a test of the $1.3265 key high from August again. The momentum indicators are strongly in favour too, with the MACD lines accelerating above neutral having posted a bull cross, whilst Stochastics and RSI are both rising bullishly with further upside potential. Buying into intraday weakness remains a good strategy with the hourly RSI consistently finding lows around 50, whilst hourly MACD lines are also holding strongly above neutral on these minor dips. The hourly chart shows minor higher lows being left at $1.3060 and $1.3030 above the $1.3000 breakout.

 

USD/JPY

The key floor has finally given way as the yen strength and dollar weakness has combined to drive a big breakdown. The dollar is being smashed and a massive support of the April low at 108.11 has now been broken to take Dollar/Yen to its lowest level since November and the nascent stages of the Trump driven dollar rally. Yesterday’s strong bear candle had already broken 108.11 without a closing breach, however further losses today seem destined now to confirm the move. There is initial support from the July 2016 rally high at 107.45, whilst the 61.8% Fibonacci retracement of 100.07/118.65 comes in at 107.17, both of which are realistic targets today. The concern will now be that momentum has now got downside potential for the run lower. Old support also now becomes new resistance, so there is a band of overhead supply waiting with the next clutch of sellers between 108.11/109.00. Any technical rally that helps to unwind the hourly momentum is likely to now be seized upon.

 

Gold

With the renewed dollar weakness, gold continues to advance. Another strong bull candle has pushed the market through to multi-month highs once more and continues the move towards the 2016 high of $1375. Momentum remains bullish across the board with the RSI in the high 70s and MACD lines accelerating higher. This simply reflects a strong trend rather than an overbought or stretched market. Despite this, corrections remain a chance to buy. Gold has shown that throughout this run higher, old breakout levels have become supportive, so there is now a band of underlying demand $1340/$1344. There is also further support around this week’s reaction low at $1327. There is nothing on the Bollinger Band analysis that suggests the uptrend is running ahead of itself, whilst the Parabolic SARs are at $1324 today for a profit-taking signal. Again look to buy into weakness for the test of $1375.

 

WTI Oil

The market formed an uncharacteristically neutral candle on the day of the EIA inventory report. Usually a day where volatility and direction is extended, it was a very quiet session for oil. With the EIA inventories report fairly close to market expectations (especially on crude which was almost bang on) the market retains its prevailing trend of improvement, a move that is reflected in marginal early gains today. The test of the old six month downtrend remains in sight, coming in today at $49.75, whilst the bulls will also still be eying the key August high at $50.43. Daily momentum indicators remain positively configured, whilst on the hourly chart a recent six day uptrend is also intact where unwinding moves continue to be bought into. Support at $48.50 will be seen as a key near term gauge for the continuation of the recovery now.

 

Dow Jones Industrial Average

The volatility of earlier this week has started to settle, but there is still a legacy of the decline which is impacting the market. There has been a rather tepid rebound that seems to now be failing at 21,850 and another negative candle yesterday suggests there is still a cautious presence in the market. Momentum indicators are still in a bearish drift and this could add to pressure on the support from Tuesday’s low at 21,710. Despite this though, the longer the support band 21,600/21,680 remains intact the more confident the bulls will be.  The hourly chart shows the Fibonacci retracements of 22,179/21,600 are still a gauge, with support at 21,737 from the 23.6% Fib level. There is further resistance at 21,920 with a gap down from 21,975 still open.


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