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FOMC rate hike supports the dollar but will it continue?


Market Overview

The dollar has found support after the Fed meeting, but is it a move that is likely to continue? The FOMC hiked rates as expected by 25 basis points to a Fed Funds target range of 1.00% to 1.25%. This was the second rate hike of 2017 and the dot plots leave the expectation of a desire for a third. Additionally the FOMC also laid out the beginning of its balance sheet reduction (if the economy allows it) which could now start as early as September. This all sounds fairly hawkish, however the market seems to be less than convinced. A sharp downward revision to inflation projections shows the Fed is on track but questions the how stable that road of tightening is. Treasury yields reflect this concern as the two year yield (the rate sensitive end of the curve) reacted positively whilst the 10 year yield (more concerned with growth and inflation expectations) was more reticent. With US CPI and retail sales both missing to the downside yesterday, the yield curve continued to bear flatten, as reflected on the 2s/10s spread around 79 basis points (at the height of the reflation trade in December it was 135 basis points). The dollar may have reacted marginally higher to the FOMC, but the market looks unconvinced.

Dollar

Wall Street closed mixed, as the Fed tightening into failing reflation tends to be a negative combination for equities. The S&P 500 was -0.1% at 2438, whilst Asian markets were also cautious (Nikkei-0.2%). European markets look slightly corrective in early moves. In forex there is some mild dollar gains early today but it is interesting to see the Kiwi strongly underperform after weaker than expected New Zealand growth. The Aussie is also an outperformer after Australia unemployment fell unexpectedly to 5.5%. Gold is hanging on to the pivot support around $1261 but a thread, whilst oil prices remain under pressure after another EIA inventory report related sell-off.

After this week’s spike higher in UK inflation and continued slide in UK wage growth, the Retail Sales and Bank of England decisions will be key. UK Retail Sales are announced at 0930BST and the ex-fuel adjusted data is expected to have the spike dropped by -0.8% on the month (having grown by an impressive +2.0% last month) and the year on year reading is expected to drop back to +1.9% (from +4.5% in April. This would suggest that the high inflation and low wages are really starting to bite and would have a significant impact on growth. The Bank of England monetary policy is also under the microscope at 1200BST. No change in rates at +0.25% or QE Gilts target at £435bn (plus £10bn of corporate debt) is expected, so the voting numbers will be monitored. An expectation for 7 voters of no change whilst Kristin Forbes continues to argue for a hike. There is no quarterly inflation report this meeting. The US data in the afternoon starts with the New York Fed manufacturing at 1330BST which is expected to improve back into positive territory at +4 (-1 last). The Philly Fed Business Index is also at 1330BST and is expected to drop back to +24.0 (from an impressive +38.8 last month). US Weekly Jobless Claims are expected to dip slightly to 242,000 (from 245,00 last month). US Industrial Production is at 1415BST and is expected to rise by +0.2% for the month with Capacity Utilization staying at 76.7. The NAHB Housing Market Index at 1500BST is expected to stay at 70.

 

Chart of the Day – DAX Xetra

The outlook for the DAX remains strong, even if the market continues to struggle to sustain the breaks into new all-time high ground. For the second time in the past couple of weeks an intraday break to a new high has been scuppered into the close. The daily chart subsequently shows a potentially negative looking candle. However the DAX has a strongly configured daily chart configuration and there is little reason not to think that corrections remain a chance to buy. In the past four weeks since the correction back from 12,824 the DAX has posted a series of higher lows and the bulls have used the corrections as an opportunity to buy once more. A small gap from yesterday’s positive open lies at 12,790 and could easily be filled today as the market dips back in the early moves. Furthermore, the recent run higher forms a bull trend which currently comes in around 12,700 whilst the bulls will be interested to see that the momentum indicators remain in medium term bullish configuration but also with upside potential. The RSI is rising around 60, whilst the Stochastics are tracking higher and the MACD lines are now consolidating well above neutral.  The positive momentum configuration is reflected on the hourly chart and this correction seems to be another chance to buy.

EUR/USD

Looking at yesterday’s candle, it could be easy to come to rash conclusions. The failed upside break which found resistance at $1.1295 only to close back lower for just a handful of pips gained on the day could arguably be a negative candle. However, the move is probably just a case of no overall change in outlook and move on. This is though the third consecutive very small bodied candle of gains and the bulls are struggling to build traction and the longer this continues, the more questionable the positive outlook becomes. However, whilst the reaction low at $1.1165 remains intact then there will still be a bullish bias. Momentum indicators are still suggesting that this is a phase where the bulls will be looking to use as a buying opportunity, as the RSI and Stochastics are holding up above 50. The hourly chart shows that yesterday’s spike low following the FOMC at $1.1190 is now initial resistance, with initial resistance at $1.1230.

GBP/USD

A choppy session yesterday has ultimately held on to the basis of resistance around $1.2775. A spike to $1.2817 could not be held in the wake of the FOMC and the area of overhead supply above $1.2775 hit the brakes on the rebound. The almost doji candle denotes uncertainty, so the market will be looking at today’s reaction with interest. A bear candle today would certainly help to bolster the resistance around $1.2775 once more. The momentum indicators remain corrective with the RSI struggling  below 50 and the MACD lines now falling below neutral. Rallies remain a chance to sell with a view that this rebound is simply a pullback to the neckline of the two month top. Continued failure below the $1.2775 resistance will build up the selling pressure once more. A move below yesterday’s low at $1.2720 would increase the downside impetus too with key support at $1.2632.

USD/JPY

The five week downtrend continues to cap the gains and suggests that rallies remain a chance to sell. The negative configuration of the momentum indicators also reflects this with the RSI and MACD lines struggling under 50 and the MACD lines also falling below neutral. The downtrend today comes in at 110.20 which is under yesterday’s reaction high at 110.35. Although the market failed to hold on to the downside break below 109, there is a sense that yesterday’s low at 108.80 is likely to be retested in due course. The hourly chart shows a market unwinding back to help renew downside potential with a band of initial resistance 109.90/110.35 now. Key resistance is at 110.75 now.

Gold

A volatile trading session has put the pressure back on $1261 once more. It had looked that the bulls were ready to take control again, but the intraday rally failed at $1279.40 (which is now a key resistance) and gold suffered in the wake of the FOMC rate hike. The subsequent intraday sell-off closed at $1260.70. I have been discussing for a while now the impact of closing breaks of $1261, however this very marginal of breaks needs more confirmation, so we look to today’s candle to back up the breach with a second closing break. If this were to be seen then I will be turning more near term corrective. The momentum indicators are becoming concerning for the bulls now with the MACD and Stochastics lines falling. The early intraday rebound today has also come up against initial resistance, falling over around $1266.50, whilst hourly momentum is looking concerning for the bulls. An intraday breach of yesterday’s low at $1256.60 would add further fuel to the corrective fire. The bulls are hanging on, but only just.

WTI Oil

The oil price has been looking to build support in recent days but once more the EIA oil inventories have put the bears back in the driving seat. The early June completion of the top pattern below $48.00 implies $4 of downside towards $44.00 but this could also mean that the spike low of the May which is at $43.75 could easily be tested. The overhead pressure of resistance continues to mount, with the $46.70 rebound high strengthening below the medium term pivot at $47.00. Yesterday’s loss of the support at $45.20 simply re-opens the downside once more. Momentum indicators remain bearishly configured and any intraday rallies should be seen as a chance to sell. The hourly chart shows near term overhead supply for an intraday rally now between $45.20/$45.70.

Dow Jones Industrial Average

The Dow remains positively configured and with an outlook of continued buying into weakness. The strength of the momentum comes with the RSI pushing steadily towards 70, whilst the MACD lines continue to track higher and the Stochastics have remained in strong configuration for the past three weeks. There is a band of breakout support now between 21,112/21,225 that will be used as a basis of support but it was also interesting to see the bulls supported above 21,300 yesterday. This means that corrections will continue to be seen as a chance to buy. The market has now posted a sequence of five consecutive higher daily lows and this suggests that even intraday weakness should be bought into. The bulls do remain strong but it will be interesting to see how they react, trading towards the top of a three week mini uptrend channel. This could give a minor reaction lower once more.


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