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ISM data could be key as the dollar approaches a crossroads


Market Overview

There are signs forming over the past day or so that the dollar is stabilising and seems to be approaching a near term crossroads. Is this just consolidation in front of the key ISM Non-Manufacturing and Non-farm Payrolls data, or is it the beginning of a sustainable rally? The euro remains strong despite the continued divergence in the yield differentials, whilst continued record long net euro positioning will have the attention of the contrarians. Sterling has also held on to its recent breakout as the market prepares for the Bank of England. However, there are other key markets that the dollar is showing signs of recovery, with a rebound against the yen and gold. These markets are at an important crossroads now. However the driver will be today’s ISM data (with special interest in the @price paid@ component) and of course tomorrow’s Employment Situation report. These two data sets in the next two days could be crucial in determining the sentiment on the dollar for the coming days and possibly weeks up to Jackson Hole.

Change tracks

Wall Street has been climbing higher, with the Dow into all-time high ground above 22,000 however looks stretched. The S&P 500 was +0.1% at 2477  but Asian markets were mixed to lower overnight (Nikkei -0.3%) whilst European markets are trading cautiously lower in early moves. In forex there is a consolidation on the euro, sterling and yen, whilst the commodity currencies look under pressure in early moves. Gold is around $4 lower and has dropped back to test the $1260 pivot today, whilst oil has dropped back by around half a percent.

Today is all about services PMIs and the Bank of England. Early in the European session the services PMIs from across the Eurozone countries are releases, culminating in the final Eurozone Services PMI at 0900BST which is expected to be in line with the flash reading of 55.4 (last month 55.4), whilst the final Eurozone Composite PMI is expected to be 55.8 which would be down from last month’s 56.4. The UK Services PMI is at 0930BST and is expected to tick marginally higher to 53.6 (from 53.4) and this will be a key number for sterling as services account for around 80% of the UK economy. However that is not the only key economic data to watch for sterling today as the Bank of England has its Super Thursday at 1200BST with monetary policy, the meeting minutes and its Quarterly Inflation Report all released. The MPC is not expected to hike rates this month, despite coming close last meeting with 3 members voting for a hike. Kristin Forbes (one of the dissenters) has now left the MPC and the expectation that her replacement Silvana Tenreyro closely shares the dovish views of Governor Carney, so the vote is likely to be at the most with 2 dissenters, but this could even be as little as one, given the recent drop in inflation. If so, this would be sterling negative. The Bank’s inflation and growth forecasts in the inflation report will also be interesting. The US ISM Non-Manufacturing is at 1500BST and is expected to dip slightly to 57.0 (from 57.4). Factory Orders are also at 1500BST and are expected to be +2.9% for the month after falling by -0.8% last month.

 

Chart of the Day – NZD/USD

The Kiwi is beginning to come under selling pressure as the market has just started to post corrective candles again. This comes ahead of the RBNZ meeting on 10th August in which rates are likely to remain on hold for a while. Technically there have been two strong negative candles completed in the past two sessions which have now started to ask questions of the bulls again. Having found resistance under the old May/June uptrend, the market is now retreating to break a three week uptrend. The momentum indicators are beginning to deteriorate now, with the Stochastics crossing lower and confirming a sell signal, whilst the MACD lines are also crossing lower. The RSI, having been above 70 has now dropped below 60 and a move below 50 would confirm the corrective outlook. This all makes the support at $0.7400 increasingly key near term and a close below would constitute a breakdown. The hourly chart shows a more correctively configuration on momentum, with a failure under pivot resistance at $0.7460 adding further corrective pressure. The daily chart shows the net support is $0.7345 and then $0.7260.

EUR/USD

The euro remains strong as the market has pushed out to further multi-year highs. The uptrends are all strong and momentum in bullish configuration. There will come a time in which some profit taking sets in, but for now the bull run remains firm and true. Yesterday’s candle has a few doubts potentially with the run to a high of $1.1909 which subsequently pulled back to close around the mid-point to leave a questionable bullish candle. However, as yet there is nothing really to suggest the bulls have lost control. There is a three week uptrend at $1.1740 which is above the latest breakout support at $1.1711, with intraday corrections still being bought into.

GBP/USD

The bulls remain in control as the Bank of England is set to announce monetary policy today. Another multi-month intraday high was posted yesterday with $1.3250, whilst the next resistance is minor at $1.3275 before $1.3345 and the upper reaches of the Q3 2016 trading range at $1.3480. Momentum indicators are strongly configured with the RSI rising in the high 60s, whilst MACD and Stochastics are also strongly configured. It is highly likely that today will be a volatile session with services PMIs for both the UK and US in addition to Super Thursday for the Bank of England. This is likely to drive near term direction. The six week uptrend is supportive back at $1.3075 so there is room for a minor pullback still, with the breakout support still $1.3050/$1.3175. The hourly chart shows the market settling down for a potentially big day. Initial support is at $1.3187.

USD/JPY

In the context of the three week downtrend, today’s session is important. Previously when there has been a positive candlestick, the next session has simply seen a resumption of the bear control and continuation of the trend lower. So posting a low at 109.90 on Tuesday, followed by yesterday’s rebound, there is a decision to be made. Momentum indicators are still bearishly configured, with minimal impact on MACD or Stochastics, whilst the RSI is only around 40. Rallies still need to be seen as a chance to sell, and the market has pulled back from yesterday’s high at 111.00. The hourly chart shows a consolidation has taken hold with indicators flattening off. The near term gauge will be support at 110.27 and resistance at 111.00. A move through these levels could be the trigger for the next leg as it would represent an end to some minor consolidation. A third rebound candle posted with a close above 111.00 would certainly begin to question the control the sellers have.

Gold

The market has consolidated in the past few sessions and early this morning has pulled back to the pivot around $1260. This is a basis of support and with the added support of a near four week uptrend at $1256, means the bulls have a key decision to make. Momentum indicators have just rolled off the top but remain positively configured and there is still a strong suggestion that if the support holds today then this will prove to be a good opportunity to buy for further gains towards the $1296 high. This is therefore an interesting crossroads for gold. A close back below $1260 would question the bull control but the uptrend is also a factor, so a breach of $1256 would be a negative signal. There is nothing that is especially concerning at the moment and corrections remain a chance to buy.  Resistance is at $1274 from Tuesday’s high.

WTI Oil

Suddenly, the oil bulls are not having it all their own way again. Tuesday’s strong bearish engulfing daily candle has changed the sentiment on the chart. The reaction to yesterday’s weekly EIA inventories was mixed and may have posted gains on the day, but the pressure is mounting for a potential correction now. The response of the market today could be key to the potential correction. Another negative candle would add to a picture of deterioration near term. The hourly chart shows a deterioration on momentum indicators that suggests waning upside. The support at $48.25 marks the neckline of a near term top pattern now and also needs to be watched. The bulls need to breakout above $50.43 to be back in control.

Dow Jones Industrial Average

The market has crept above 22,000 (undoubtedly helped by a huge gain on Apple shares), but there is still a sense that perhaps the rally could be beginning to slow. The last couple of sessions have shown gains but the daily candlesticks suggest a less bullish picture with the positive patterns waning in recent days. This is coming with the RSI above 74 and the Stochastics having rolled over. The rally is starting to retreat back into the Bollinger Bands too and this also suggests a slowing trend. The gaps from earlier this week at 21,841 and subsequently 21,930 remains open which remains a question mark for the bulls.  The potential for a consolidation from all-time high ground is certainly growing.


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