Hawkish comments from Yellen drives dollar higher

Market Overview

After the politically driven moves on forex markets in recent days, it was the turn of Fed chair Janet Yellen to grab the mic and drive dollar direction. Yellen’s relatively hawkish comments that suggested the committee needed to be mindful not to be slow in normalising rates for fear of some “nasty” surprise further down the line. Treasury yields pushed strongly higher with this and the dollar reacted higher also. The key will be now whether this is a turning point in this dollar correction. Watch for a push above 2.45% on the US 10 year yield which would be an indication of a change in sentiment. This dollar rally has impacted across the forex majors and commodities and leaves several markets at key crossroads today. The market will be looking towards the ECB to be a driver of direction today so there could be some further volatility today.

Yellen comments

Wall Street remains in consolidation mode with once more little direction to be gained, with the S&P 500 +0.2% at 2272. Asian markets were mixed overnight however the relative yen weakness has helped the Nikkei to add 0.9%. European markets are cautiously higher in early moves. Forex markets show a mixed outlook across the majors whilst gold is back to the key psychological $1200 level again. Oil is mildly higher after a sharp decline yesterday and will see further volatility today with the EIA inventories.

Traders will be firmly focused on the ECB monetary policy meeting with the rates announcement at 1245GMT and the press conference at 1330GMT. There is no expectation of any change of rates from the existing levels of 0.0% for the main refinancing rate, with a deposit rate of -0.4%. The press conference is also likely to be fairly sedate, given the ECB decision to extend easing at the December meeting and the absence of staff forecasts this month. However given the improvement in Eurozone inflation recently and uptick in PMI indicators, perhaps  Mario Draghi might even be able to crack half a smile this time. The US data comes with the US Building Permits at 1330GMT which are expected to tick higher to 1.23m (from 1.20m) and Housing Starts which are expected to improve to 1.20m (from 1.09m). The Philly Fed business index is at 1330GMT and is expected to dip back slightly to 15.8 from 19.7. Weekly Jobless claims are at 1330GMT and are expected to be 254,000. The EIA oil inventories are at 1600GMT and crude stocks are expected to be -1.7m barrels, with distillates are expected to be -1.4m barrels with gasoline stocks at +2.3m barrels.

 

Chart of the Day – EUR/JPY

The bull candle that came with yesterday’s rally could now be an important move that helps to define the near to medium term outlook. In the past 8 sessions the outlook has turned corrective and a break below 121.55 completed a top pattern that implies around 230 pips of downside. The more corrective configuration on the momentum indicators are also suggesting now that the bears have the upper hand. So now with the rallying candle yesterday this becomes an important moment. A failure of a rally in the range between the neckline of the top at 121.55 (i.e. a pullback to the neckline) and a lower high posted at 122.40 could herald renewed selling pressure. So we watch for a potential sell signal between 121.55/122.40 today. The alternative is a close above 122.40 which would be a bull move that negates the corrective outlook. The hourly chart shows the strength of the rebound yesterday with the hourly momentum more positive now, but can it be sustained? A failure would re-open the low at 120.55 and then 118.50/118.70 becomes the key support. Initial support is 121.20/121.40.

EURJPY 19012017

EUR/USD

We currently find that EUR/USD is trending higher and this means that the corrective moves are being bought into. The past two days have had increased volatility and magnitude of the candles but no change to the outlook yet. Tuesday’s strong bull candle has been balanced to an extent with a strong bear candle yesterday, but whilst the support at $1.0577 remains intact, the trend continues higher. Momentum indicators are still positively configured with the RSI holding for the past 9 sessions above 50 and the Stochastics now into strong territory. The early gains today will be helping to settle the bulls’ nerves. The hourly chart shows the market again unwinding to the support of the rising 144 hour moving average and the hourly RSI has again unwound to just above 30 similar to the move on Monday. There is no reason yet to change the near to medium term view of buying into weakness on EUR/USD. Initial resistance is $1.0670 and $1.0720.

EURUSD 19012017

GBP/USD

It is possible now that with the strength of the buying pressure that came with Tuesday’s huge bull candle that the move was something more than merely a short squeeze and that sterling is now in the process of forming some real support. However, for the near term outlook, it was a concern that the instant reaction yesterday was a bear candle formation that dragged Cable back by over 150 pips. The daily momentum indicators are still mixed in configuration and whilst the sensitive Stochastics are rising at a one month high, the RSI and MACD lines are still uncertain. I have been looking at the old pivot line around $1.2300 as a gauge for the near term outlook and with the move fluctuating above and below this pivot overnight and into today’s session, the outlook is mixed. Another old support at $1.2200 is also back in play and a failure of this level would confirm the bears putting the pressure back on. The initial resistance above the $1.2300 pivot is $1.2350 which now protects the key highs $1.2415/$1.2430. The overnight low was $1.2250 which is initially supportive.

GBPUSD 19012017

USD/JPY

With the strength of the rebound which formed a hugely strong bull candle yesterday, this becomes a key moment for Dollar/Yen. The move which added over 200 pips on the day has bounced the market straight back to a key resistance area between 114.80/115.05. Throughout December and early January this area has been key for turning points and the market could now be at another inflexion point. The momentum indicators have picked up but as yet do not suggest this to be a buy signal. The market needs a confirmed move above 115.05 today to end the corrective move we have seen over the past couple of weeks. The hourly chart shows positive momentum configuration and a move above all the hourly moving averages. An intraday push above 115.45 (and preferably a session close above) would also suggest the bulls were regaining the upper hand again. Initial support is at 114.35 with 113.70. Above 115.45 opens 116.85.

USDJPY 19012017

Gold

The dollar regaining strength yesterday has impacted across forex and also hit the gold price. One more this is a market with an important session ahead as the price has unwound to the breakout around $1200. This means that Tuesday’s strong bull candle has been entirely unwound and this is a concern for the bulls. Although the support at $1200 has been briefly breached early today, the market will be looking at a close back in the $1100s as a negative move. A failure of the support at $1187.50 would also be a confirmation move for the end of the bull run. The momentum indicators are rolling over on the daily chart, but the Stochastics are yet to confirm any sell signal. The hourly chart looks more corrective and this suggest that this day has a feel of being the market at a crossroads. The initial resistance is $1207/$1210 and a move back above here would help to reengage the bulls. However a move back under the overnight low at $1197 would increase the concern that this is a forming correction. We will know more with confirmation of today’s close.

Gold 19012017

WTI Oil

The bears have taken over control once more and despite the downtrend of the past few weeks having been broken a couple of days ago. The near term resistance at $53.50 could not be broken and now the negative candles are building up again. Yesterday’s sharp bear move as the dollar regained lost ground saw the market 2.7% lower and a move that took the price back below the pivot at $52.00 which is a negative near term move. This has now re-opened the key low at $50.70. It is also interesting to see on the hourly chart that the old pivot around $52.00 that had been supportive turned back into resistance yesterday. Hourly momentum indicators have also turned more corrective. The concern now becomes that a breach of support of $50.70 turns a near term corrective outlook into something far more concerning for long positions.

WTI 19012017