Despite the strong ISM data out of the US yesterday, the dollar failed to really drive home the impetus that had built up yesterday and market moves into today’s session are fairly mixed. There is a positive sentiment in markets with the safe haven Japanese yen still under pressure and the commodity currencies holding up well. However the drop off in the US 10 year Treasury yield will be a concern for the continuation of the dollar bull run and although the Trade Weighted Dollar Index remains positive, it will need Treasury yield to continue higher to help drive further dollar gains. The focus will switch to Eurozone inflation today and after German inflation surprised to the upside yesterday, the potential for a positive surprise has become greater. However inflation picking up in the Eurozone seems to be more oriented to the increase in oil, as core inflation is not expected to increase.
Wall Street closed higher last night with the S&P 500 up 0.8% at 2258 whilst Asian markets mixed to positive with the Nikkei up 2.5% on the continued yen weakness. European markets are positive today. Forex markets show the risk improvement with the yen weakness and mild outperformance of the Aussie and Kiwi. Gold has been supported from a mix of dollar sentiment, whilst oil is trading mildly higher as traders react to yesterday’s late sell-off.
The services PMIs for the Eurozone dominate the early European session, with the final Eurozone Services PMI at 0900GMT which is expected to stick at 53.1 (which would be down from last month’s final PMI of 53.8). With the German CPI surprising to the upside yesterday, the Eurozone flash CPI for December will be keenly watched at 1000GMT which is expected to pick up to +1.0% (from +0.6% previously) although the core CPI is expected to stick at +0.8% for the year. The focus of the day though will be on the FOMC minutes from the December meeting which is at 1900GMT. Traders will be looking for any further drivers of the dollar from the committee hawks.
Chart of the Day – NZD/USD
I looked at the Aussie dollar yesterday which was shaping up for another key downside break and the Kiwi has a similar look to it as the market has dropped back to eye a test of the late December low at $0.6860. The negative candle formation yesterday just failed to form a bearish outside day after having posted another high around $0.6970 (the resistance of the old November low) only to sell sharply lower from the highs of the day and below the previous day low. The market is mildly higher this morning but downside pressure is still mounting with every failure to break back above $0.6970. The momentum indicators are struggling with the RSI having once more turned lower, the MACD lines failing again. The original breach of $0.6950 was the key medium to longer term break on the Kiwi and opens potentially 450 pips of downside in the next six months. The fact that the market has failed around the neckline is a significant concern for the bulls and a breach of $0.6860 would open the next leg lower. There is initial support around $0.6800 but the May low at $0.6675 would be within range. The hourly chart shows $0.6920/$0.6950 is a near term sell zone today.
The chart is under pressure again as the dollar bulls resumed control to drag the market back to multi year lows once more. Although the move below $1.0350 bounced from $1.0339 and failed to close below the break, the intent remains. Yesterday’s candle was the second successive negative candle and the momentum indicators are all looking more bearishly configured once more with the RSI falling and the Stochastics crossing lower again. It seems that another confirmed downside break is imminent for the move towards parity in the coming weeks. The hourly chart shows a succession of lower highs and resistance is mounting under $1.0500 with rallies being sold into. There is now a minor sell-zone band between to watch between $1.0445/$1.0500.
With Cable trading below $1.2300/$1.2330 the outlook remains negative for a drift back towards the range lows around $1.2080. The momentum indicators are firmly in negative configuration with the RSI dropping back below 40, the MACD lines falling below negative and now the Stochastics beginning to cross lower once more. This all suggests that rallies remain a chance to sell. A second straight bearish candle on the daily chart yesterday has put the pressure back on the immediate support at $1.2197 and the hourly chart is showing a run of lower highs where every time the market looks to rally the bears are ready to regain control once more. There is resistance around $1.2305 and then $1.2355 whilst the hourly RSI is failing around 50/60. Below $1.2197 re-opens the lows at $1.2080.
Can the bulls manage a breakout? Yesterday’s run higher failed to make the move above the resistance at 118.65 as the session peaked at 118.60 before sliding back into the close. Although the session had a positive close, the resulting candle was hardly one to get the pulses racing for the bulls. It was more of a damp squib with a very small bodied candle. That makes today’s session important as if the market again posts a disappointing candle then the bulls may begin to get a bit twitchy. The momentum indicators are still strong for now with the RSI rising and the Stochastics having just crossed higher again. Yesterday’s low at 117.20 will be key today and the bulls will need to continue to post another positive day above the close of 117.75. The hourly chart shows decent support at 117.20 and positive momentum, however the hourly RSI below 40 would be a warning, as would the hourly MACD lines falling below neutral. A closing breakout above 118.65 would be bullish for the continued move towards the 76.4% Fibonacci retracement of 125.85/99.09 at 119.53.
I remain a seller into strength on gold and am sceptical of putting too much credence in the recovery seen during the thin trading of Christmas/New Year. Despite this though the bulls fought back well into the close yesterday as the dollar started to drift off again, with the posting of a decently positive candle. I see this rebound as a bear market rally and the current move is unwinding from the 76.4% Fibonacci retracement of $1047/$1375 around $1124 and is now approaching the 61.8% Fib retracement at $1173. There is also a consolidation band from early December around this Fib level which should prove to be an area of overhead supply. Currently though the near term recovery is still on, with the momentum indicators all pointing higher, however the RSI is nearing 50 again which could begin to be seen as a point to start considering selling opportunities once more. The hourly chart shows minor resistance around $1163.50 with $1145.70 supportive. The next resistance within the old November/December sell off is $1180.20/$1187.70 and $1197.50.
With the first real trading day of the year where desks have been up to something like full capacity, it was interesting to see the sharp decline on oil which formed a strong bear candle. This was a bearish engulfing candle on the daily chart and this means that today’s session is incredibly important as it has put a corrective outlook to the daily chart. Will the bears take control? The support just above $52.00 will be very important as the momentum indicators are dropping back and a breach of the support would be a confirmed near term breakdown. The hourly chart shows resistance now around $53.40 which needs to be reclaimed otherwise the pressure will mount. A breach of $52.00 would open $49.95. The resistance at $55.25 is now key.