Last updated: May 3rd, 2017 at 09:55 pm
An air of caution is beginning to come over markets as the huge run higher on the dollar consolidates with it beginning to run out of steam. For the past couple of days now the excessive moves higher on Treasury yields have begun to settle down and although the dollar briefly pushed above the key resistance of 100.5 on the Trade Weighted Dollar Index yesterday (to reach its highest level since 2003) there is a feeling that some of the steam is beginning to go out of the dollar bull run. Whether this turns out to be the beginning of a near term corrective move, or just a pause for breath remains to be seen but there are a few signs of exhaustion on technical charts such as the Dollar/Yen and Euro/Dollar, whilst gold has been consolidating for the past few days. Equity markets are also showing signs of caution again.
The raft of Fed speakers continue to add to the intriguing outlook as everyone tries to come to terms with a Trump presidency. They have been reasonably hawkish on balance, although the Fed’s Patrick Harker believes it is too early to assess the impact, Loretta Mester would consider the impact of extreme volatility which could sway her. There are more FOMC members serving up their views today. The most important will be Janet Yellen who testifies before the Joint Economic Committee, however there is also Bill Dudley and Lael Brainard too. Brainard could be the interesting one as she has been on the very dovish end of the scale and a shift would be a significant change of stance.
Wall Street closed marginally lower last night with the S&P 500 -0.2% at 2177, whilst Asian markets have also been cautious, (Nikkei closed almost dead flat). European indices are looking mixed around the open today with little real direction. This mixed outlook is reflected in forex markets with the euro and sterling mildly higher. The Aussie is also a mild underperformer following the release of Australian unemployment this morning which had a couple of very marginal disappointments (on total employment and participation rate mainly). Gold and silver are mixed, whilst the oil price is slightly lower.
Traders will be looking out for UK Retail Sales at 0930GMT which are expected to show an improvement to +5.4% for the ex-fuel YoY (up from +4.0% last month). Final Eurozone inflation is at 1000GMT which is expected to possibly be revised higher to +0.5% (from +0.4%) on the headline YoY, although the core is expected to stay at +0.8%. US CPI inflation is the key in the afternoon and it will be interesting to see if there is an uptick to +1.6% for the headline YoY (from +1.5) and the core data to remain at +2.2%. Building permits are also at 1330GMT (1.20m expected) and Housing Starts (1.16m expected) and weekly jobless claims are expected to stay around recent levels at 254,000. The Philly Fed business index at 1330GMT is expected to dip slightly to 8.0 (from 9.7).
Chart of the Day – USD/CHF
I am becoming somewhat more wary of chasing the dollar higher, but one market that is not stopping at the moment is Dollar/Swiss. There has been a key resistance of a 0.9950 in the past 9 months which has been a range high, however this resistance has been decisively broken by this move. The past couple of days we have also seen a confirmation of the move with two closes above the level of parity which has also been an barrier to gains previously. The move is a huge long term breakout on Dollar/Swiss and completes what is now a long term base pattern that implies around 475 pips of upside towards 1.0425. The bull run posted a very neutral (almost doji candle) yesterday and this could be the initial sign of slowing in front of the next resistance at 1.0094 which was the March high and a level that protects the January 2016 high at 1.0257. Momentum indicators are strong for medium to longer term gains and even if there is an initial corrective move it would likely be bought into. There is now an excellent band of support 0.9950/1.0000 to be seen as a “buy-zone” for a pullback in the coming days. The hourly chart shows that the bull run has been using the rising 55 hour moving average as a basis of support at 1.0005 today, whilst near term momentum remains bullishly configured. A move below Tuesday’s low at 0.9923 would turn the near term outlook more corrective.
It had looked as though the bulls may be able to fend off the selling pressure yesterday as the support around the old January low at $1.0709 was seeming to hold. However the pressure has told in the end and a drop to $1.0663 with a close below $1.0700 has simply continued the bearish run of eight bearish candles. This decisive breach of $1.0709 means the euro is trading at a 2016 low and opens the key December 2015 low at $1.0538. On each of the past couple of days there has been early support for the euro in the session, but each time the intraday rallies are being sold into. The early support today may induce a minor technical rally but there is little to suggest that it will not be sold into again. The only real caveat on the daily chart is that the RSI is at 27 and is stretched. However the bear momentum is so strong that even if there were to be a technical rally it is likely to last only a day or so before the bears resume control. The hourly chart shows negative momentum across the board, whilst a succession of lower highs at $1.0815 and $1.0760 are in place, whilst early today the old $1.0709 support is acting as an intraday barrier to gains.
The daily chart suggests that support for Cable is waning as a third consecutive bear candle has been posted. However, despite the early formation of another negative candle today, all is not yet lost. The momentum indicators are fairly mixed now, however the Stochastics falling away is a concern. The daily chart also shows the pair still trading above the 21 day moving average and also still above the neckline support at $1.2330. The hourly chart shows more of a mixed outlook and that the recent reaction lows at $1.2350 and $1.2380 remain intact as support. There is a mild negative bias to the hourly momentum indicators, whilst the market is also trading under the moving averages. However whilst the near term supports remain intact the outlook will not be negative. A move below $1.2330 would though change the outlook. The lower high at $1.2515 now protects resistance at $1.2557.
With the incredible run higher from 101.15 at the nadir of the Trump election day, the pair had rallied well over 800 pips in just over a week. Despite smashing through several key resistance levels, this run higher was eventually going to struggle and start to consolidate. The marginally negative daily candle posted yesterday seems to have been the bulls questioning just how much further the immediate upside would take, with the RSI up around 77 at one stage yesterday (which is incredibly stretched for Dollar/Yen). Will this turn into a corrective move now? The hourly chart shows that the early dip today hit the support bang on the breakout support at 108.55 and this now becomes a key line in the sand near term. The formation of a lower high below 109.75 with a drop back below 108.55 would now shift the near term outlook. However for now the correction has quickly bee supported. I am still expecting there to be a pullback to the key neckline support at 107.47 at some stage, at which point I would then be looking for the next medium term buy signal.
Gold is in consolidation mode now. The selling pressure may have dissipated in the past couple of days with a low at $1211, however there has been a struggle to engage a recovery of any real note. The daily candles in the past two sessions have a supportive but mixed outlook, and whilst the momentum indicators may have bottomed, the bulls are still failing to get an adequate foothold and this is being reflected in the RSI and Stochastics struggling to tick higher. The hourly chart shows that a neutral formation has developed now as the market has been unable to breach resistance at $1233 but support of a minor higher low at $1219 also remains intact. I would still not rule out a rebound back towards $1241/$1247 however would see that as limiting with overhead supply. I am still favouring a test of the key $1200 support in due course.
The volatility was high in the wake of the EIA oil inventories as usual, and although the instant reaction to the larger than expected inventory builds was a little surprising, given the support for the price, the market dropped away into the close. However, the intraday support at just above $45.00 is intact and improves the prospect of a sustainable breakout above $45.95, which is still yet to be held. The breach of resistance at $45.95 has been touch and go in the past couple of days and with the key resistance at $46.50 (which is an old medium term pivot) still intact, so for now it is still a risk to chase the oil price higher. Despite this though, the $45.00 support yesterday was above $44.30 which has been a near term pivot and a continuation of this support at higher levels will improve the recovery outlook.
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