The dollar has been strengthening in the days since Janet Yellen’s hawkish lean in her Jackson Hole speech and this is now driving some key tests across major markets. Forex pairs and commodities have all been impacted by the dollar strength with key crossroads now being reached as traders look ahead towards Non-farm Payrolls tomorrow. With the euro having dropped away, the rebound on Dollar/Yen and a correction o gold have brought these key markets right back to crucial levels where sentiment could make a profound shift if pushed over the edge. The short end of the US yield curve has pushed higher whilst the longer end has failed to make any real move, reflecting a re-pricing of the prospect of a rate hike but still little real improvement in growth expectations. It is PMI day today and China has kicked it off with a mixed showing, the government’s data improving above 50 to 50.4, whilst the unofficial Caixin data was a slight miss of expectations at 50.0. A strong ISM number this afternoon would give the Fed further food for thought.
In the past couple of weeks, equity markets have been struggling with the weight of deteriorating commodities prices, a stronger dollar and increased expectation of a Fed rate hike. Wall Street was again lower last night with the S&P 500 down -0.2% whilst Asian markets also tracked mostly lower (although the Nikkei was +0.2% on yen weakness again). Despite this, European markets have been supported at the open with the oil price higher by just under half a percent, but will this last as oil has been under consistent pressure in recent days. In forex there is an air of consolidation with very little real direction of any note as the European session takes over, although the Aussie is trading higher on the solid China PMI, despite Australian retail sales disappointing. Gold and silver are also trading mixed.
The PMIs are the main focus for traders today. The Eurozone Manufacturing PMI is at 0900BST and is expected to hold in mildly expansionary territory at 51.8. The UK Manufacturing PMI at 0930BST will be key for sterling as it will give a further indication of how post-Brexit Britain is looking, and the expectation is for a slight improvement back to 49.1 (from 48.2 last month). The US ISM Manufacturing is at 1500BST and is expected to drop slightly to 52.0 (from 52.6). Weekly Jobless Claims are at 1330BST and are expected to be 265,000.
Chart of the Day – AUD/USD
The technical outlook has really shifted back towards one of US dollar strength in the past few days since the hawkish lean from Janet Yellen in her Jackson Hole speech. A bearish engulfing candle last Friday has been another negative candle in the sequence since the August peak of $0.7756, moving below the near term support at $0.7580. This was an important move because this old support has subsequently become the basis of resistance for rallies this week. Tuesday’s bearish move was a latest candle break lower which has continued the deterioration. The bulls have lost control also with the broken three month uptrend, whilst this move has also been confirmed on momentum indicators with the most negatively configured since late May, the Stochastics also at a three month low. Recovery candles have been disappointingly tepid for the past two weeks now as the pair has dropped away and rallies are increasingly seen as a chance to sell. Yesterday’s mildly positive “spinning top” candle has been followed by early gains but it will be interesting to see if the bulls can sustain the move. The bear trend suggests that a test of the key July low at $0.7417 is increasingly on the cards if the US dollar continues to strengthen. Looking further back on the daily chart shows $0.7400 is a long term pivot. The hourly chart now shows a 50 pip “sell-zone” near term between $0.7530/$0.7580 which is likely to be where the next lower high is posted as the hourly momentum indicators unwind their bearish configuration and renew downside potential.
Since last Friday’s huge bearish engulfing candle (in the wake of Janet Yellen’s Jackson Hole Speech) the dollar has been strengthening which has in turn been dragging the EUR/USD pair lower. A slight rebound counter to this trend lower was seen yesterday and a mildly positive bull candle posted. This does little to change the direction of the trend for the time being but could also be an opportunity to sell as intraday rallies have been consistently sold into over the past few days. Momentum indicators are more corrective with the RSI now back below 50 whilst MACD and Stochastics have been falling away. A retreat back to the old long term pivot band $1.1050/$1.1100 is still likely now. The early signs are today that the bears are still in control as the price dips back lower again. The importance of the Non-farm Payrolls report on Friday may begin to drive some caution, but for now the hourly chart shows minor resistance at $1.1200/$1.1210, with hourly momentum having unwound to renew downside potential again. More significant resistance is at $1.1233.
The old trend and pivot line that have been in place over the past couple of months are still acting as key for the near term turning points on Cable. The shallow downtrend that links the highs since Brexit remains the overhead barrier (today around $1.3245), whilst the pivot line at $1.3060 which acted through July and August has once again provided the basis of the floor for the past three days. This floor at $1.3060 has prevented the selling pressure from building too significantly and has maintained what is actually a fairly neutral outlook over the past 8 weeks. The positive candle from yesterday has stopped a run of four negative candles that had threatened to turn into something more bearish. Momentum indicators are settled around neutral configuration and it looks like the next catalyst for direction is needed (perhaps payrolls on Friday?). The hourly chart shows a near term range formation between $1.3060 and overhead resistance at $1.3175. I still favour selling into strength due to the trend lower.
With the dollar strengthening on six consecutive bull candles the rally on USD/JPY has now reached the resistance of the falling long term trend channel (around 103.50). This is now a key crossroads for the pair and it is interesting that the overnight move has been mildly lower in what looks to be a cautious move. The daily chart also shows a resistance of the old breakdown around 104.00. The momentum indicators are also back to key levels, especially the RSI which has consistently unwound to 60 in the past few months and then failed. The Stochastics are back in positive territory and show the strength of the recovery, but the pace of the rally is now decelerating. Is the hourly chart also showing a loss of impetus with the hourly RSI and MACD lines arguably showing negative divergences? There is now resistance near term at 103.53 whilst a drop back below 102.85 would reflect a deterioration. There is further support at 102.40. This is becoming a pivotal moment for the pair.
The important levels are not constrained just to forex, with gold also having now retreated back to its key medium/longer term support. I have been talking about the $1306 long term breakout for months and that gold had just been in a holding pattern over the past few weeks. The strengthening of the dollar has dragged gold back towards this support once more and this is now a key moment for the precious metal. The near term corrective move has been in place now for over two weeks which has seen momentum indicators deteriorate with the RSI now its weakest since the end of May. However the move has unwound gold back towards the support band $1300/$1310 and also the uptrend support which has been in place since December and today comes in at $1295. This is all coming ahead of Non-farm Payrolls on Friday which could drive a decisive breakdown on gold on a strong number. The deterioration over the past few weeks has driven a negative outlook on the hourly chart with resistance now in place between $1315/$1325 and negative configuration on indicators as the selling pressure remains on.
As with most Wednesdays, the EIA oil inventories have driven volatility and a significant move on WTI Oil. The larger than expected increase in crude oil stocks (and smaller than expected drawdown in gasoline stocks) suggest supplies are growing and this is bearish for the oil price. This helped to drive a big downside move on WTI with a decline of over 3% and the bears increasingly in control. The concern is that momentum is accelerating lower and indicators are reflecting an increasing shift towards the bears. A clean break of the 50% Fibonacci retracement of the original June/July sell off from $51.67/$39.20 at $45.43 now opens the 38.2% Fib level at $43.96. The RSI is dropping fast below 50, the Stochastics have given a confirmed sell signal near term whilst the MACD lines are also crossing lower. Rallies are increasingly being seen as a chance to sell, with the 50% Fib level at $45.43 now a basis of resistance. The hourly chart shows a previous banc of support between $45.80/$46.40 will now be seen as an area of overhead supply and a “sell-zone” for intraday rallies. The hourly chart shows the next significant support is at $43.40.