General market sentiment remains positive as Wall Street continues to run into all-time highs amidst a backdrop of rising oil and metals prices. The dollar bulls made their first real impact on 2018 yesterday as a strong ISM Manufacturing print and relatively hawkish FOMC minutes helped to drive a near term dollar rebound. The question is now whether this is the beginning of a turnaround of fortunes for the dollar which had come under a bout of selling pressure late in 2017. The reaction of the coming sessions could be key to this as the Dollar Index has recently completed a significant breakdown below support at 92.50/92.75, meaning that this could simply be playing out as part of a pullback rally. The FOMC minutes suggested the committee was mindful of the positive economic impact of the Republican tax reform, but the continued sluggish inflation is a counterbalance to any acceleration in the tightening cycle. Traders will increasingly be looking ahead to tomorrow’s Non-farm Payrolls report for signs of inflation, with traction in wage growth being key. If this is seen then it would likely start to drive a more considerable dollar rebound. For now the move is in its infancy and there is no confirmation of any longevity.
Wall Street closed strongly higher again, with the S&P 500 +0.6% at 2713, whilst Asian markets were also positive overnight, with the Nikkei storming 3.3% higher as it played catch-up. European markets are also positive in early moves. Forex trading shows yesterday’s dollar rebound stalling a touch today as the move unwinds slightly, with no standout performer, other than mild yen weakness. In commodities, the bull run on gold has stuttered for now, with an early $3 dip, whilst oil continues to make strong gains after yesterday’s API drawdown of 5m barrels of crude.
The services PMIs take much of the focus for today’s trading, with the Eurozone final services PMI at 0900GMT expected to be confirmed at 56.5 (which would be a mild improvement on the 56.2 from last month). The UK Services PMI is at 0930GMT and is expected to tick mildly higher to 54.1 (up from 53.8 last month) but after both the Manufacturing and Construction PMIs failed to meet expectations there will be concern that the services number that represents around 80% of the economy also disappoints. The ADP Employment change at 1315GMT is seen to be a gauge for payrolls on Friday and is expected o be 191,000 (very slightly up from 190,000 last month). The US EIA Oil Inventories are at 1600GMT and are expected to show crude stocks in -5.2m barrels of drawdown (after -4.2m barrels of drawdown last month), whilst distillates are expected to build by +1.0m barrels (+1.1m last week) and gasoline stocks are expected to increase by +1.9m barrels (+0.6m last week).
Chart of the Day – GBP/JPY
Sterling/Yen has been shaping for a test of the key medium term resistance between 152.85/153.40 since Christmas, however, does yesterday’s one day corrective candle signal another near term high? The bearish outside day session posted a high right at 152.85 and threatens to unwind the recent gains. This would be the third time the resistance has come in to play and it is interesting to see that all of the previous runs higher (in September and twice in December) were met with a strong corrective candle, just as we saw yesterday. This comes with the daily RSI again turning back from 60 whilst the MACD lines have failed to ignite with the recent run. A five week uptrend is now being tested and a closing breach would open initial support at 151.15 but a more considerable retreat could subsequently set in. The hourly chart shows the deterioration has hit the outlook for hourly momentum on RSI and MACD lines which are reflecting the downside pressure that is mounting near term. Is this now a chart that is now in decline?
As the dollar bulls clawed back some lost ground yesterday the market posted a solid negative candle which dragged 45 pips lower. This was the first really negative candle seen on EUR/USD since mid-December and poses a few questions for the bulls. I mentioned yesterday that EUR/USD tends to struggle with the RSI over 70 and once more this seems to have been the case as the market has pulled back from $1.2082 and just shy of the key September high of $1.2092. For now this is merely a bump in the road but it gives an added importance to today’s session. A second consecutive bear candle would begin to form a sequence. The initial support is at $1.2000 and a close below would put pressure on the November breakout support at $1.1940/$1.1960. The momentum indicators are looking to consolidate for now as the early move today has found a little support. The hourly chart shows the early rebound adding a more positive outlook once more and for now corrections remain a chance to buy. A move on the hourly RSI below 30 would change this though.
After the strong move higher in late December, will yesterday’s corrective bear candle begin to open the gates for profit taking again? For now the market appears stable as near term support between $1.3490/$1.3500 is holding, however we will know more after today’s session. A second negative candle in a row would suggest that a shift in sentiment is taking place once more. Momentum indicators are threatening to roll over but for now remain positively configured. The hourly chart shows how important the support around $1.3500 is today, whilst the hourly RSI continuing to hold above 30 is also key near term. A breach of $1.3500 would open $1.3425/$1.3450 initially, but more importantly would mean that Cable was corrective within the range once more. Resistance is at yesterday’s high of $1.3612.
Can the dollar bulls hold a sustainable improvement? A rebound from the key near to medium term support around 112.00 left a positive candle yesterday and the move continued into the Asian session today. However as the European traders take over the market has dropped back and leaves a sense that rallies remain a chance to sell. The rebound has rolled over around 112.75 which is again under the near term pivot around 113.00. A failure to break back above 113.00 would be disappointing for the bulls and retain a mild negative bias within the recent 112.00/113.75 trading range. Momentum indicators are in the process of neutralising, as the MACD lines settle around the zero line and RSI flattens above 40. This is reflected in the lack of real directional signals on the hourly chart, however as with the daily, there is a mild corrective bias still in place. A breach of initial support at 112.40 would re-open the key 112.00 low. A breach of 112.00 completes a five week top pattern and open for a deeper move to the downside.
The uptrend on gold of the past few weeks remains intact, however the bulls have lost their way a touch in recent days. Posting a high of $1321.20 during yesterday’s early session, the market has begun to slip back towards the $1300/$1310 long term pivot band again. The uptrend comes in around $1302 today, so the $1300 breakout support is increasingly important now. Momentum indicators have lost their sheen a touch but for now remain positively configured (although if the RSI closes below 70 it would be a disappointment). The hourly chart reflects the loss of impetus too. However, all is not yet lost for the gold bugs as the support above $1300 remains strong and this can still be a pullback towards the medium term breakout of the $1300/$1310 pivot which is now supportive. A decisive close below $1300 would though change that. Initial support of today’s low is at $1305.60.
The bulls are on a tremendous run. After a day of consolidation on Tuesday the market again pushed ahead within the uptrend channel to leave another strong bullish candle yesterday to trade around two and a half year highs. Momentum indicators continue to rise strongly with the daily RSI into the 70s now whilst the MACD lines accelerate higher and the Stochastics are extremely positive. The next resistance is being tested from a series of range highs from mid-2015 between $61.60/$62.60. The bulls will note the uptrend channel limit currently comes in around $62.10, around current levels which may begin to limit immediate upside potential, however the strength of the momentum would suggest little reason to stop the bulls for now. The hourly chart looks a touch stretched and this could also limit immediate upside today. However, intraday corrections remain a chance to buy with the hourly RSI again picking up between 40/50 whilst the MACD lines are well above neutral. The support initially between $60/$60.75 is now a near term buy zone.
Dow Jones Industrial Average
Another positive session on Wall Street has now aborted the corrective impact of the bearish engulfing candle from the final day of 2017. After a rebound on Tuesday, the market pushed to an all-time high yesterday (following the S&P 500 and NASDAQ) above the previous high of 24,876. This completed a small range breakout and implies 170 ticks of additional upside towards 25,045 meaning that the 25,000 next key psychological barrier is well within reach. With an Average True Range of 130 ticks, this could now be seen as early as today. There has been a positive reaction by the bulls this week and the momentum indicators are responding accordingly. The RSI is back above 70, with the Stochastics still positively configured and the MACD lines beginning to recover. Hourly momentum is looking to sustain a positive configuration with the MACD lines supported above neutral and hourly RSI still suggesting that corrections are a chance to buy. Initial support is now 24,855/24,876.
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