Hawkish Fed speakers drive the dollar despite Trump’s speech underwhelming

Market Overview

The market had been preparing for Donald Trump’s big speech, and although it underwhelmed it has been the hawkish comments from Fed speakers that has really impacted on the market. In the event, Trump’s speech left traders wanting more, as he failed to flesh out the detail on his plan of tax cuts and infrastructure spending. In effect he did little more than re-iterate what he had already said previously. He discussed making the tax environment for businesses more competitive and also the potential for a US border tax to help exports. However, without detail, the market was left somewhat disappointed, but what saved the dollar from a sell-off were the hawkish comments from FOMC members Bill Dudley and John Williams. Dudley note that the case for tightening was ”a lot more compelling” and Williams suggested that March was very much on the table for a potential rate rise. The yield of the 2 year Treasury has subsequently shot higher as a result, with shorter dated duration more sensitive to prospective rate hikes. The 2 year yield has now added over 14 basis points, bouncing from 1.145% to over 1.280%, since Monday as traders price in the increased potential for a rate hike from the Fed in two weeks. It is the first say of the new month today so this means traders will be deluged with the PMIs, whilst US inflation is also key on the agenda for today. A jump in the Personal Consumption Expenditure will only add fuel to the fire for a March hike and pull further dollar strength.

Trump Congressional speech

Wall Street closed lower with the Dow breaking its run of twelve positive closes, as the S&P 500 was -0.3 at 2364. Asian markets have been broadly mixed to positive post-Trump, with the Nikkei +1.4% on the stronger dollar. European markets are also looking mildly higher today. Forex markets show the dollar stronger across the board, with the yen being the standout underperformer. This dollar strength is impacting on the metals with gold lower again, whilst oil is also marginally lower as the threat of a near term dip lower continues.

As markets continue to react to Donald Trump’s big speech, there is a raft of key data points to factor in also today, reflecting both growth and key US inflation. On the first day of the month, the manufacturing PMIs are always keenly watched. The final Eurozone Manufacturing PMI is at 0900GMT and is expected to be confirmed at the flash reading of 55.5 which would be mildly higher than last month’s 55.2. UK Manufacturing PMI at 0930GMT is expected to dip slightly to 55.6 (from last month’s 55.9). German inflation is announced regionally throughout the morning with the countrywide number at 1300GMT which is expected to increase to 2.1% from last month’s 1.9%. The Federal Reserve’s preferred inflation reading, the Personal Consumption Expenditure is at 1330GMT and is expected to pick up to 2.0% on the headline and to +1.8% on the core. The US ISM Manufacturing PMI data is at 1500GMT and is expected to stay steady at the 56.0 that was announced last month. The Bank of Canada monetary policy is also at 1500GMT and is expected to hold rates at 0.50%. There is also the EIA weekly oil inventories at 1530GMT which is expected to show the crude stocks increasing by another 2.8m barrels, distillates falling by -0.8m barrels and the gasoline stocks falling by -1.9m barrels.

 

Chart of the Day – USD/CAD

Dollar/Loonie has broken higher. I recently discussed the fact that the support around 1.3000 continued to hold and a subsequent rally has meant that a multi-week downtrend had broken. However, this trend break has now developed into a small base pattern with a move above the resistance around 1.3210 which had twice capped the upside in February. This breakout confirmed yesterday with a strong bull candle and now implies around 200 pips of upside recovery towards 1.3410. The improvement is reflected in the improvement in the momentum indicators with the RSI and Stochastics both at two month highs and pushing into strong configuration. The hourly chart shows far more positive set up now on the momentum configuration and that near term dips will be seen as a chance to buy. There is a band of support that is strong around the breakout 1.3160/1.3210, with the bulls initially looking at 1.3265/1.3285 to potentially hold support today. The next key resistance is the late January high at 1.3387.

EUR/USD

The consolidation of the past few days has been threatening the downtrend but without any confirmation, and now it seems that he dollar bulls are beginning to grasp control again, this will add to the downside pressure once more. Monday’s low at $1.0550 is an important gauge near term and a closing breach tonight would confirm the EUR/USD bears are back in the driving seat. The long upper shadows of the candles of each of the last three sessions reflects a lack of conviction in the appetite for a recovery and rallies continue to be sold into. The momentum indicators are negatively configured for the medium term outlook and this all points towards a negative outlook forming again. The hourly chart shows no clear decisive move lower yet and the importance of the support around $1.0550 today. Resistance is now $1.0590 and $1.0630, whilst the key resistance is still $1.0680/$1.0710.

GBP/USD

After weeks of consolidation around the pivot at $1.2430, a third consecutive bearish candle is putting pressure on the downside for the key support at $1.2345. The momentum indicators are looking to tick lower once more although as yet there is no confirmation of a bearish configuration. The hourly chart shows how the support that had previously been holding firm at $1.2380 has now been breached and this is a key near term development for the breakdown of the consolidation. The market has also now closed well below the $1.2430 pivot and looks to be confirming the move today. Intraday resistance is at $1.2405 but the bears will be eying $1.2345 key support which is the key February low. A closing breach would open $1.2250 initially but point towards further downside in due course. Resistance is at $1.2480 and $1.2570.

USD/JPY

The positive candles formed over the past few days suggests that once more the bulls are happy to build from the support band 111.60/112.50 and the medium term trading range continues. A bullish outside day candle seems to have turned the corner for the near term outlook once more. A second daily close above 112.50 is also an important aspect for the bulls to feel they have a foothold back in the range. This positivity has continued into today’s session with further recovery gains. The momentum indicators have ticked higher with a bull cross on the sensitive Stochastics. The hourly chart shows the strong pick up through overhead resistance at 112.90/113.20 and now the bulls will be eying the key near term reaction high at 113.77 and the old range pivot at 114.00. The 112.90/113.20 range becomes supportive today as the hourly momentum indicators begin to look more favourable. Above the 114.00 pivot opens the resistance at 114.95.

Gold

With a second completed negative candle a corrective move has dragged the market back to the key breakout around $1244.70. I discussed yesterday that the bulls would be looking for a buying opportunity in the support band $1236/$1244. However there needs to be a buy signal around a basis of support, so it might be best to wait for this to form first. The near term outlook has taken more of a corrective tone with the RSI dropping back below 60 from hitting 70 previously, whilst the Stochastics have also ticked lower. The medium term uptrend today comes in at $1231 so there is still room for this corrective move to play out further and still retain the uptrend support. The hourly chart also looks more corrective and there is near term resistance $1248/$1250 which if continues to remain intact today will add to downside pressure. I still expect this to be a correction within the medium term uptrend, but see waiting for support to form before piling back in for the long side. There is a lower high now at $1258.30 under the $1263.70 main resistance.

WTI Oil

The oil price has started to look a bit heavy up around the range highs again and a correction is threatening. Having trended higher for almost three weeks towards the highs of the trading range, yesterday’s negative intraday move shows that the trend higher over the past three weeks is being threatened. Although the bounce into the close prevented a closing break, the doji candles of the last two sessions reflects uncertainty. Ultimately this is still a trading range that has been forming over the past three months now and this would be a corrective move back from the range highs. Momentum indicators are threatening to roll over, especially on the Stochastics. The Stochastics turning lower from 80 is a concern if they begin to track consistently lower, whilst the RSI again failing under 60 would turn corrective if a move below 50 were to be seen. The hourly chart shows the uptrend support and support of the rising 144 hour moving average has now been decisively breached, and is now becoming a basis of resistance. Furthermore, a move below $53.75 has confirmed that $54.60 is now a lower high under $54.95. The corrective pressure would ramp up on a close below $53.35 and would open a move to test the key mid-February lows around $52.75. Momentum on the hourly chart also shows that rallies may now be seen as a chance to sell near term.


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