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Has Fed chair Powell signalled the end of dollar strength?


Market Overview

Amidst all the geopolitics of the trade dispute, Italian budget and Brexit, the Fed’s monetary policy has taken a bit if a back seat role in recent times. However, Fed chair Jerome Powell gave markets a reminder yesterday that there is more to sentiment than geopolitics, in a speech that may now have changed the course of the dollar bull run. In recent FOMC meetings, the Fed has maintained a consistent hawkish line of its monetary tightening. However, this appeared to shift yesterday as an erstwhile hawkish Powell, hinted at an end in sight for Fed tightening. He said that Interest rates “remain just below the broad range of estimates that would be neutral for the economy”. This is a shift from what Powell said in October where he suggested they could still be “a long way” below neutral. He also suggested (as vice chair Clarida had on Tuesday) that the Fed should be data dependent. It will be interesting to see the FOMC minutes tonight as it seems that recent rhetoric has likely pivoted away from the hawkish messages of recent Fed meetings. Markets responded and continue to this morning. Treasury yields are falling, especially at the shorter end of the curve. The US dollar formed a bearish engulfing candlestick (bearish key one day reversal) to turn decisively lower. The biggest move was reserved for Wall Street which saw equities jump impressively. The “Powell put” perhaps? The question is whether this is a seismic shift in policy direction that will end the dollar bull run that has been so prominent since April. We may need to wait until the December FOMC meeting for confirmation, but traders may not wait that long.

Dollar rally falling over

Wall Street bounced strongly on the back of Powell’s dovish comments yesterday. The S&P 500 jumped 2.3% although futures are ticking a shade lower by -0.2%. Asian markets have been mixed this morning with the Nikkei +0.4% and the Shanghai Composite -1.3%. European futures are showing decent gains with FTSE 100 and DAX around half a percent higher. In forex, there is broad dollar weakening across the G4 majors, but there is a lack of direction on commodity currencies so far. In commodities, gold and silver have been supported from yesterday’s late rally, whilst oil is also finding a degree of support today.

The key economic data point for today comes with the Fed’s preferred inflation gauge, the core PCE but also the FOMC minutes for the October meeting. However, in the European morning, traders will be looking for the countries of the Eurozone which release inflation numbers, with German inflation especially in focus. German inflation is released state by state through the morning with the countrywide number at 1300GMT and is expected to tick a shade lower to 2.4% (from 2.5% in October). US core Personal Consumption Expenditure for October is at 1330GMT and is expected to be +0.2% on the month which would pull the annual data back to +1.9% (from +2.0% in September).  US Weekly Jobless Claims at 1330GMT are expected to tick down a touch to 220,000 (from 224,000 las week). US Pending Home Sales are at 1500GMT which are taking on added importance after the miss on new homes yesterday, with pending sales expected to grow by +0.5% in October. The FOMC minutes for the October meeting are released at 1900GMT and will be looked at for any acknowledgement of a slowdown in economic growth trends which have become increasingly noticeable in recent weeks. It may be a touch early for this to come through the minutes and subsequently there may be less emphasis taken off any perceived hawkishness in the minutes.

 

Chart of the Day – EUR/NZD

Euro/Kiwi is teetering on the brink once more. Having held on to support around 1.6550 earlier in November, a support which has been the basis of a floor over the past 13 months, a near term recovery has quickly run out of steam and the market has dropped back to again test the key floor. With Tuesday’s sharp negative candle followed by another negative move yesterday the bears are getting ready. An intraday breach of support bounced back to close only just below the support, with a degree of uncertainty today. However, this looks to be a breakdown that is ready to go now. This comes with momentum indicators which are now rolling over to renew bearish configuration but with downside potential. A second closing breach of 1.6550 and would confirm the key shift in the outlook. With resistance being bolstered at 1.6790 in recent days, with the hourly chart reflecting a negative near term outlook on momentum, intraday rallies are a chance to sell. There is a near term basis of resistance around 1.6640/1.6690 which is a sell zone for further pressure on 1.6555. Below the long term support is 1.6360 and then 1.6145.

 

EUR/USD

Fed chair Powell has completely changed the near term outlook on EUR/USD. A corrective drift in recent sessions has been turned on its head in one session, where a rally has formed a bullish engulfing candle to improve the outlook. Now the key for the euro bulls is to build upon this move. The rally has left support at $1.1265 and pulled the pair back towards the upper barrier of the downtrend channel again. An early gain today suggests that there is an appetite to continue with this (dollar weakening) move to test the nine week trendline around $1.1415 today. There is still key overhead resistance with the lower high (and pivot) around $1.1430 and the November high at $1.1470 still to overcome. However, momentum indicators have ticked back positively, with the MACD lines posting a “bull kiss” and RSI around 50. This is a key moment for EUR/USD bulls. This is the time for a decisive rally. However, the resistance needs to be broken first.

 

GBP/USD

With both central bank chiefs giving crucial monetary policy assessments within an hour of each other yesterday there has been considerable volatility through Cable. The net result yesterday was that the market took Fed chair Powell’s words more to heart and pushed dollar weakness to drive Cable almost 80 pips higher on the day. A positive candle managed to be almost the complete mirror image of Tuesday’s bear move and the market is now on the brink of breaking the three week downtrend. However, the trend could break through consolidation now and it is not something to get too worked up over. A little near term noise. With plenty of volatility yet to play out over Brexit politics, this move has done little to shift the outlook. The resistance at $1.2925 (last week’s lower high) is still in place, whilst momentum indicators have barely flickered either. What the move has done though is to help bolster the support at $1.2720. The hourly chart shows very little direction on a near to medium term basis, in a move which is increasingly turning into a consolidation above the $1.2720 support but below the $1.2885/$1.2900 resistance. Hourly indicators have improved from yesterday’s rebound but remains broadly neutrally configured.

 

USD/JPY

The medium term outlook remains positive on Dollar/Yen where corrections remain a chance to buy. My issue is that I am not convinced that there is too much upside potential in the bull runs. The mid-November low at 112.30 is a key near to medium term basis of support, whilst the support of the six month uptrend comes in at 112.10 today. The medium term configuration on momentum indicators also point towards near term corrections being used as a chance to buy. So with the dollar negative rhetoric out of Fed chair Powell, the pair has fallen. A mildly negative candle formed into the close yesterday but the early morning move today has continued the fall away. On a near term basis there is support in the band around 112.90 which is a pseudo pivot. How the bulls react around there will be telling as to how far a correction will go. There is further support of a higher low at 112.65 which the bulls would certainly like to hang on to. Resistance has formed at 114.03 just a shade below the 114.20 November high, whilst the hourly chart is now showing 113.45/113.70 is a near term resistance band this morning.

 

Gold

The dovish comments from Jerome Powell has hit the dollar and seen a shift back into gold. The corrective drift of the past week has turned around. A positive close yesterday is the first in four sessions, and is being followed by gains today. I spoke in the daily videos yesterday that it was important for the bulls to respond quickly to the drop back into the $1208/$1217 band and they have done. If this is now also followed by a move above near term resistance at $1230 then the bulls will gain some real confidence for a test of $1236 again. There is still an uncertain look to momentum indicators, but if the Stochastics can find traction above 80 then this would be a signal of intent. Support has formed around $1210 now from yesterday, whilst $1217 also becomes a basis of support again.

 

WTI Oil

With another larger than expected crude inventory build, the momentum has switched negative again. Having spent much of yesterday’s session holding on to the consolidation of recent days, the bears seemed to grasp control once more into the close. A strong bear candle formed, with a close around the day low, but also testing the recent minor floor at $50.10. With the oil price still hovering around the psychological support at $50 today a move that takes WTI below $50 would be a key blow now. The consolidation of recent days is very nervous and with momentum indicators deeply negative still, another downside break is still highly likely. The trend is your friend on oil and a four week trend is at $53.35 today, whilst resistance is mounting overhead. Old support becomes new resistance, with $52.75 growing below $54.75.

 

Dow Jones Industrial Average

Equities have been so downbeaten in recent weeks that the dovish comments from Fed chair Powell have been leapt upon to pull the market decisively higher. A huge bull candle formed yesterday, with gains of over 600 ticks and 2.5%. Yesterday we talked about a near term recovery target of just over 25,000 and this target has been smashed. The move above 24,900 is a key move and now opens a test of 25,510 initially which comes at the bottom of a band of resistance 25,510/25,800. Momentum indicators quite understandably have turned higher, with a bull cross on Stochastics and one ready on the MACD lines. With three strong bull candles in three days, intraday corrections will now be seen as a chance to buy.


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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.