Forex markets are consolidating today after a recent rebound for the dollar, whilst equities remain positively set as Wall Street hits another milestone. Speculation over the identity of the next Fed chair is helping to turn the outlook for the dollar more positive again, with a relatively more hawkish (certainly more than Janet Yellen) John Taylor an increasing possibility. This is helping to drive 2 year Treasury yields ever higher and the dollar stronger. The fact that the US yield curve continues to flatten though will be a concern, with the US 2s/10s spread now below 75 basis points to its lowest since November 2007, almost 10 years! Despite this though, the dollar is performing well as the euro remains under pressure from downside pressure on Bund yields, whilst sterling is dropping back on dovish rhetoric from two MPC members which dampens tightening speculation. The Dollar Index is pulling higher again and this is impacting across major markets. Another interesting factor to watch for is the outcome of Chinese ruling party’s Congress that takes place every five years. Markets in Asia are eagerly anticipating policy announcements that could shape the growth path of the world’s second largest economy for years to come.
Wall Street closed positively yet again with the Dow hitting 23,000 for the first time, whilst the S&P 500 was +0.1% at 2559. Asian markets were broadly mixed to positive with the Nikkei +0.3%. European markets are positive at the open but can the momentum be sustained this time? In forex, there is a continuation of the dollar rebound of the past couple of sessions. In commodities there is a reflection of this consolidation with gold broadly flat, whilst oil is mildly higher.
After UK CPI and comments from the Bank of England’s Governor Carney yesterday, the focus for sterling will come with the UK employment statistics. Although the headline UK unemployment at 0930BST will be of interest, unemployment is expected to stay at 4.3%, however the real interest will be in the Average Weekly Earnings growth (ex-bonus) which is expected to drop to +2.0% (from +2.1%) thus further deteriorating the negative real wages in the UK. US Building Permits are at 1330BST and are expected to drop slightly to 1.25m (from 1.30m) whilst housing starts are expected at 1.18m (in line with 1.18m last month). The EIA oil inventories are at 1530BST and are expected to show crude stocks drawdown by -4.8m (-2.8m barrels), distillates drawdown by -1.5m (-1.5m barrels) and gasoline stocks in drawdown by -1.0m (+2.5m barrels). There are another two FOMC members also set to speak today with Bill Dudley (voter, centrist) and Robert Kaplan (voter, mild dove) both at 1300BST.
Chart of the Day – GBP/JPY
The pressure that sterling has been coming under since topping out at 152.85 in September seemed to be dissipating on a sterling rally, but the selling pressure has been renewed as a strong bear candle took hold again yesterday. The corrective downtrend has now been stretched out to over three weeks now, but the concern that it is not yet done comes from the fact that the market is back under the long term support of the key breakout of 148.10. The momentum indicators have rolled over once more with the RSI back under 50, the Stochastics crossing back lower under 40 and the MACD lines still tracking lower. This all points to a retest of the early October support at 146.90, however initially the spike low at 147.27 will be tested. The hourly chart shows the strength of the pivot resistance at 149.20 whilst also showing how the hourly RSI failed at 60 and hourly MACD lines failed around neutral, which reflect the near term corrective outlook. There is a near term pivot around 148.40 which will now be seen as a chance to sell.
There is a growing sense of dollar strength coming back across markets and this shows in EUR/USD which has been tracking lower now over the past few sessions. Another negative candle was completed yesterday as the market tracks back lower, clear of the old $1.1820 neckline pivot. The way daily momentum indicators are shaping up now the pair is on course for a pull lower towards a test of the key support around $1.1660. The Stochastics have just made a bear cross around neutral, whilst the MACD lines are rolling over under neutral and RSI is falling below 50. The hourly chart is negatively configured near term with the hourly RSI failing between 50/60, hourly Stochastics rolling over and MACD lins running out of steam. Initial resistance is growing at $1.1780 as the market has peaked overnight. Yesterday’s low at $1.1735 is likely to come back under pressure and a breach re-opens the downside again.
Yesterday’s bearish candle was quite significant. The market had rebounded recently to something of a crossroads where the momentum indicators had unwound back towards neutral configuration and the market was settling around a confluence of old support at $1.3250. However a sharp intraday drop back has completed a second negative daily candle and look to be forming a renewed downside push. The support of the spike low at $1.3120 is key near term now as a failure of this low would confirm the bears back in control for a test of $1.3025 again. The momentum indicators are deteriorating once more and it is interesting to see the MACD lines starting to track lower again, whilst the Stochastics are crossing lower around neutral. The hourly chart shows a sequence of lower highs and deteriorating near term momentum with the hourly RSI failing in the 50/60 area now. Intraday rallies are being sold into suddenly. Initial resistance is $1.3235 with yesterday’s peak of $1.3287. As the market is already rolling over again today expect a retest of yesterday’s low around $1.3150 before pressure on $1.3120 again.
With the dollar turning more positive against several of the majors we also see Dollar/Yen beginning to pull higher too. However there is more work for the dollar bulls to do before they can be considered to be back in control here, with a far less certain outlook. Yesterday’s candle ended up being a doji, depicting indecision and coming around the neckline of the top at 112.20 this reflects a market still unsure of itself. The dollar bulls have edged higher again today and although there is a positive bias to the medium term momentum outlook, intraday fluctuations are still lacking a decisive signal. The RSI is flat in the mid-50s, whilst the MACD lines are levelling off. The hourly chart shows the resistance band 112.60/112.80 still intact and until this is breached there will be something holding the market back. However with the hourly momentum indicators taking on a more positive configuration it looks that support is building above 112.00 for a test of the 112.60/112.80 band today. An upside break re-opens 113.43.
With the dollar strengthening, the gold price comes under pressure. The recovery of last week is now being turned on its head again as the long term pivot band $1300/$1310 has seemingly played a crucial role once more. The high at $1306 is strengthening as a second strong negative candle was posted yesterday. Momentum indicators have noticeably deteriorated too with the Stochastics crossing back down and the MACD lines beginning to lose their recovery. Closing back below a near term pivot at $1290 is a negative development too. This is reflected more pertinently on the hourly chart where the support at $1284 was also breached yesterday. The hourly momentum indicators are far more correctively configured now whilst the $1290 pivot is acting as an overhead barrier now. With the market again rolling over today a test of support at $1279 looks on and quickly the market will need to begin to eye $1270 and perhaps even $1260 as intraday rallies get sold into.
Oil continues to track higher as the bulls remain in control. Although yesterday’s candle showed the bulls tested, they ultimately fought back into the close and the recovery looks set to continue. A rebound off $51.20 means that a near term uptrend is into its eighth day now and means that the bulls continue to look towards a test of the $52.85 key September high. Having used the basis of support at $51.20/$51.40, the bulls will be looking at the strengthening momentum and upside potential. The RSI is rising at 60, Stochastics have just given a “bull kiss” and the MACD lines are crossing higher above neutral. These are all positive technical signals that suggest using weakness as a chance to buy. The position within the four month uptrend channel suggests that a breakout above $52.85 would open initially the high at $53.75. Any retreat that finds support I the band $51.20/$51.40 is an opportunity whilst the importance of the reaction low at $50.15 is growing.
Dow Jones Industrial Average
The Dow just continues to grind out higher as the market once more pushed new intraday and closing all-time highs, hitting 23,000 for the first time. The strength of this bull run is not to be tampered with at the moment and any intraday corrections are seen as a chance to buy. The bull run has similar hallmarks to similar runs from November 2016 when the move lasted almost uninterrupted for five weeks, whilst in February a similar move lasted for four weeks. This current run is just over three weeks now. The RSI is above 80 whilst MACD and Stochastics also remain strong. Surely the 23,000 barrier will be decisively breached again today but even if it is not, any dip is a chance to buy. Average True Range is currently 80 ticks.