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Forex markets consolidate despite tax reform optimism


Market Overview

As we move ever closer to the quietened trading of the Christmas holidays we are seeing forex markets become increasingly rangebound. However, with the prospect of tax reform tantalizingly close, the reaction in the next couple of days could be crucial for the dollar. For now the forex majors seem to be stuck in a period of consolidation. The Republicans look increasingly likely to be able to haul tax reform over the line now and it is expected that the House of Representatives will be in a position to vote on the final bill perhaps today and the Senate perhaps tomorrow. The bump higher in the longer dated Treasury yields have been unable to drive dollar strength though as the forex majors have lost a real sense of direction. A move on the US 10 year yield decisively above 2.40% could help to shake the dollar out of its slumber, but for now the greenback appears to be unmoved. Equities are making a move ahead of any successful vote, with Wall Street again at all-time highs. This has even helped formerly rangebound European markets such as the DAX to breakout. An early Santa Claus rally perhaps?

Markets board

Wall Street closed strongly higher again with the S&P 500 +0.5% at 2690, whilst the Asian markets have also been mixed to positive (Nikkei -0.1%) with European markets marginally higher in early moves. In forex the euro is ticking mildly higher but there is little sign that the recent ranges that have built up are going to be broken any time soon, as the lack of direction continues. In commodities, gold is continuing to hold on to its recovery gains, whilst the latest oil price rally is consolidating.

Traders again have a fairly quiet day for the economic calendar. The German Ifo Business Climate at 0900GMT is expected to stay broadly the same at 117.6 (last month 117.5), with a surprise having an impact on the euro and potentially the DAX. Into the afternoon, the US Building Permits are announced at 1330GMT and are expected to dip slightly to 1.28m (1.32m last), whilst Housing Starts are expected to drop to 1.25m (from 1.29m last month).

 

Chart of the Day – GBP/AUD 

The recovery on the Aussie against the major forex currencies has been remarkable over the past week. However, has that recovery now run its course? The run of six consecutive negative candle was broken yesterday as the market pulled higher. That the rally came in at the support of a three month uptrend was interesting, but also meant that Friday’s low again came around the support of the old breakout at 1.7365 (as it did in late November). The momentum indicators have unwound nicely back to areas where the bulls have tended to support, with the RSI around the mid-40s. It is also interesting to see the corrective trend on the hourly chart having been broken. The market now needs to break back above the pivot around 1.7495 to improve the near term outlook more sustainably. A second positive candle today would also help to build more positive momentum, looking for another higher low above yesterday’s support at 1.7390. The bulls will be concerned not to lose the support of Friday’s low at 1.7350, especially on a closing basis.

 

EUR/USD

The lack of direction on EUR/USD, even at an intraday level, continues. The market has now spent the past week going all but sideways and as we move ever closer to the holiday period the prospect of a decisive move become less and less. Yesterday’s positive candle lost momentum into the close to end the day around 30 pips higher, but way off the highs. This just serves to bolster the near term range between $1.1715/$1.1860. The momentum indicators are highly neutrally configured with the moving averages increasingly flat on the daily chart. The hourly chart shows the markets oscillating around on the momentum indicators with little real direction too. We wait to see if tax reform can generate some direction in the coming days, but despite the equity markets already setting a stall out, the dollar has barely reacted.

 

GBP/USD

Another contradictory candle was posted yesterday as sterling rebounded again. This continues the recent run of mixed signals that are showing on Cable as the lack of trend with a sideways shift sees the market being squeezed between the resistance of a recent two week downtrend and the support at $1.3300. Momentum indicators are fairly settled but with a slight near term negative bias as the mini trend lower has taken hold. This does tend to marginally favour pressure on the $1.3300 support, however the medium term outlook shows good support now between $1.3200/$1.3300. The hourly chart shows an oscillating market but with yesterday’s high in the band $1.3400/$1.3420 the risk is for a lower high formation again, below $1.3460. This needs to be broken by the bulls to suggest upside momentum is becoming more sustainable.

 

USD/JPY

Yet another market which shows a rangebound formation. A third successive small bodied candlestick means that the market may have edged higher, but with very little purpose in the past few days. Daily momentum indicators are beginning to settle around neutral levels and this reflects the recent tendency to trade between support at 112.00 and the old pivot at 113.00. The key resistance is at 113.75 but with the market again rolling over under 113.00 yesterday the outlook for a bull break looks unlikely for now. The hourly chart shows the market very much within the confines of the oscillating hourly RSI and MACD lines are also flat. Rolling over again this morning has put the dollar bulls on the back foot again, with yesterday’s low and initial support at 112.30 open to be tested, whilst resistance is strengthening around 112.85.

 

Gold

Markets may be lacking trend, but the rebound on gold took a step up yesterday with a solid positive candle. This continues the recovery of the past week that has seen the market rebound from $1236 into the $1260s. The breakdown below $1260 was a key move and should still mean that the market is set to drop away again once this technical rebound has played out. However in the near term a recovery is in play. There is a resistance band $1260/$1270 from a series of old lows which are a source of overhead supply now and should help to limit the rebound. However the near term momentum signals are picking up still with the RSI, MACD lines and Stochastics all rising now. The hourly chart shows a positive configuration on momentum with the price having now used $1260 as a basis of support. There is a band of support $1250/$1252 now also growing near term. Can this recovery continue or will it begin to peter out? It is interesting to see gold rally despite the progress of tax reform. Will this move last though?

 

WTI Oil

The market again posted another small bodied positive candle as the rebound from support at $55.90/$60.10 just threatens to run out of steam. It is becoming apparent that the market has formed a consolidation triangle in the past six weeks. An uptrend links all the lows (in at $56.45 today), whilst the lower highs are also linked by a lower trend (coming in at $58.40). Momentum indicators are still unwinding near term but there is a lack of intent behind the corrective move that suggests the bulls are still in control medium term. The hourly chart looks to be choppy and in a range play for now and there is little real traction in near term moves for now. Resistance at $58.85 protects $58.55. Initial support of yesterday’s low at $57.20 and then $56.95.

 

Dow Jones Industrial Average

With tax reform increasingly set to make it through Congress, the strong increase in market sentiment is pulling US equities sharply higher. The Dow once more broke intraday (at 24,876) and closing (at 24,792) all-time highs. Momentum indicators remain very strongly configured with the RSI into the 80s and MACD lines accelerating higher. The market is also continuing to use the uptrend of the past three weeks, which is now today supportive 24,670. The market has now gapped higher at the open of the past two sessions and shows little sign of reversing, however there is initial support now at 24,689. The next resistance is the psychological 25,000, however it should be noted that there was very little regard given to 24,000.

 

 

 

 

 

 

 

 

 

 

 


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.