Positive correlations breaking down as the dollar and yields split

Market Overview

As Donald Trump has started to put some of his policy pledges into practice, there has been an interesting push-pull across the markets. The positive correlation between the direction of US Treasury yields and the dollar has started to break down for the time being and is making for some interesting market moves. There is also a slight breakdown in amongst the safe havens as the yen and gold are also starting to diverge. This comes as markets try to figure out the impact of some of the growth driving moves (reducing regulation on domestic manufacturers) but also signing protectionist executive orders on tightened national security and immigration. The growth drivers are helping stocks to soar with the Dow Jones Industrial Average (mercifully) finally breaking through 20,000 whilst Treasury yields have also started to track higher again. However the dollar is not following suit which is a break from what had been seen previously. The currencies are taking more of a safe haven move, with the dollar under pressure as the Trade Weighted Dollar Index continues to creep back towards the 99.40 December low.

A split in the road

Wall Street had a good session with markets all strong into new high ground with the S&P 500 +0.8% at 2298, whilst Asian markets were also matching the sentiment, with the Nikkei +1.8%. European markets are also higher in early moves after a huge breakout on the DAX yesterday. In forex, there is more of a mixed outlook across the majors with little significant movement. However, despite a mild gain for the dollar, sterling remains an outperformer with UK Prime Minister May sounding more decisive on Brexit plans and set to meet President Trump soon. Gold seems to be stumbling again amidst the breakout on equities, with a move back below $1200. Oil remains supported by weaker dollar.

Traders will also be looking at sterling this morning as they get a first look at UK growth in the final quarter of 2016 today with UK GDP Q4 prelim at 0930GMT. The expectation is that growth would have slowed very slightly to +0.5% (down from the final +0.6% for Q3). This reading tends to be reactive for the market and can be a surprise as only around 40% of the data is available for the calculation meaning that it is open to revisions. US New Home Sales are at 1500GMT and are expected to dip slightly to 585,000 from 592,000 last month. Finally late in the evening Japanese inflation is released. The Japanese national CPI for December is at 2330GMT and is expected to tick mildly higher to -0.3% (from -0.4%) but is still in deflation. There is also the Tokyo CPI for January released at the same time which can be a steer for next month’s national data and is expected to pick up to -0.4% (from -0.6%).

 

Chart of the Day – DAX Xetra

After 5 weeks of trading in a consolidation pattern the DAX shot higher yesterday to close well into territory not seen since May 2015. The sharp bull upside move completed a breakout from a trading band of 292 ticks and now implies a move towards 11,980. The momentum indicators are looking to turn more positive again having used the consolidation to unwind. The RSI is moving out higher again, as are the Stochastics, whilst the MACD lines are also bottoming out. The breakout level at 11,692 now becomes a basis of support whilst the hourly chart is suggesting that corrections will be seen as a chance to buy. Having closed above the July 2015 high of 11,802 the next resistance is the key May 2015 high at 11,960.

DAX 26012017

EUR/USD

The bull trend continues to pull the market higher and near term corrections are a chance to buy for further recovery towards what is likely to be a test of the $1.0850/$1.0870 resistance. It is interesting to see that the near term breakout support band $1.0670/$1.0710 is still holding as a breakout support, whilst the three week uptrend support is today around $1.0670. This also comes with the momentum indicators being strongly configured for further gains. The market is positioning for another bull break today with the resistance of the past few days around $1.0775 once more ready to be challenged. The hourly chart shows the near term consolidation has helped to renew upside potential for the next bull leg in this uptrend. The market has been in a tight 70 pip range for the past few days and an upside break would imply 70 pips of further move, something which would also tie in with the move to $1.0850.

EURUSD 26012017

GBP/USD

Another strong bull candle has driven Cable higher once more and now well clear of the old breakout resistance at $1.2430. The technical indicators are increasingly positively configured with the RSI above 60, the MACD lines gaining traction having broken higher and the Stochastics also strong. Corrective moves are a chance to buy and there is a bullish configuration on the hourly MACD lines which continue to pull higher from 40/45 during the minor unwinding moves. The chart also shows that a correction used near term support at $1.2450 for the springboard for a leap higher, leaving support $1.2430/$1.2450. There is also a minor pivot low support higher up at $1.2545. The market is now well into the next overhead resistance band $1.2550/$1.2775 and with the upside potential built up there is plenty left still for a run at the key $1.2775 high.

GBPUSD 26012017

USD/JPY

The market had been briefly threatening a recovery again with Tuesday’s bullish candle, but the downtrend within the past few weeks continues and this rally simply looks to be another unwinding move. This allowed the bears return yesterday to post another negative candle which looks set to put the pressure back on 112.50 support once more today. The early move has been one of support today but the trend is lower and rallies continue to be seen as a chance to sell. The hourly chart shows a resistance has been forming around 114.00 in the past few days and which comes in below the old near term top neckline at 114.35 which is also where the three week downtrend comes in as resistance too today. With the uptick early today there is a bit of a neutral configuration developing on the hourly momentum, however the trends point lower still. Expect pressure to kick in to breach the 113.00 lows of the past two sessions and then to retest 112.50 in due course. A breach would then open 111.32.

USDJPY 26012017

Gold

It is interesting to see the gold price losing its upside impetus whilst another safe haven play, the yen, is still performing relatively well. However it is the gold bulls that are coming under pressure as the psychological $1200 support has been breached in the past couple of days. With a second negative candle in a row gold breached both $1200 and $1195.50 on an intraday basis yesterday. These are two key levels on a near term basis and a close below the latter would complete a small top pattern that would imply further correction. Although the bulls pulled gold just back above $1200 into the close, the warning signs are mounting for a correction. The momentum indicators are now rolling over with the Stochastics seemingly ready to give a confirmed crossover sell signal (or at least to take profits on longs) whilst the RSI is dropping back towards 50 and the MACD lines are close to a bear cross too. Another early fall back below $1200 seems to suggest the bulls are once more struggling today. The market has not put two consecutive bear candles together since the big bear run from November to December, but a third today would certainly suggest the outlook was changing. Under $1195.50 the support is $1187.50 and then $1177 and $1170. Resistance is at $1209/$1211.

Gold 26012017

WTI Oil

For the fifth time in the past two weeks the market has failed to break through the resistance at $53.50. This suggests that the importance of this resistance is increasing by the session. Yesterday’s candle was neutral but the fact that the market gapped lower at the open and could not sustain the intraday rally left slightly negative legacy for today. Despite this though the early move in today’s session has been higher. The outlook still has a near term positive bias, trading above the $52.00 pivot and with the daily momentum indicators looking positively configured, and the market will be a buy into weakness whilst above $52.00. A closing break above $53.50 opens $54.30 and the key resistance at $55.25.

WTI 26012017

Leave a Reply

Your email address will not be published. Required fields are marked *