Positive Dollar momentum fading quickly amid concerns over inflation

Market Overview

It has been a quiet start to the week as the momentum for the dollar from Friday’s Non-farm Payrolls report has seemingly dissipated. Concerns over low inflation and lower than expected trade data out of China have contributed to the move. Friday’s strong dollar rebound on a higher than expected headline jobs growth is beginning to ebb away once more as concerns over the persistence of low inflation have taken over once more. The payrolls report showed no pick up in average hourly earnings, whilst St Louis Fed President James Bullard, who is a non-voting dove on the FOMC, suggested that inflation still would not reach the Fed’s target of 2.0% on PCE even if the labour market tightened to 3% unemployment. US Treasury yields dropped into the close and remain subdued. The dollar has started the day mildly weaker again. Not only that, but the China trade surplus expanded to +$46.7bn (+$46.1bn exp, +$42.8bn last) whilst exports and imports both missed expectations, with Exports +7.2% (+10.9% exp) and Imports 11.0% (+16.6% exp). This is impacting on risk appetite today with gold higher and oil marginally lower.

Dollar down

Wall Street closed a quiet session once more positively, with yet another close in all-time highs for the Dow, whilst the S&P 500 was +0.2% at 2481. Asian markets were cautious to lower with the Nikkei -0.4%, whilst European markets are slightly lower impacted today by the positive currencies and miss on trade data from China. In forex markets, the dollar weakness is broad but not extensive, with little standout performers. Gold is mildly higher on the weaker dollar, whilst oil is a touch lower as the recent consolidation continues.

Continuing the theme of the first part of the week, today’s economic calendar is again very light. The US JOLTS jobs openings at 1500BST will be of interest with an expectation of a very slight decline to +5.66m (from 5.67m) which would be a five month low.

 

Chart of the Day – French CAC 40 Index

It is interesting to see the CAC conforming strongly to trend analysis throughout 2017. Initially the market formed a well-defined uptrend in the move to the multi-year high of 5442 back in May. However, with the euphoria of the French election ebbing away, so has the CAC. A seven month uptrend was decisively broken in late June and the market has subsequently formed a corrective downtrend which has been tested several times, only to remain intact. The big upswing on the weaker euro (stronger dollar on the payrolls report) on Friday drove a strong bull candle but the move has once more back to what is now a three month downtrend. The test is ongoing, with yesterday’s extremely small candle (just 25 ticks when the average true range is 61). The market has rallied back into resistance which is now in place between 5219/5259 which has capped the upside over the past few weeks. There is a continuation of lower highs and lower lows in recent months, with the RSI back to a level in the low to mid-50s where the rallies tend to peter out over the last two months. This would suggest that the “trend is your friend” and this rally is another chance to sell. Furthermore, whilst the 55 day moving average was a great basis of support throughout the first half of 2017, having turned lower it is now a basis of resistance and is falling at 5227. Another negative candle today would certainly reinforce expectation of a retest of the 5084 lows. For now though the market stands at a crossroads of resistance overhead that could also be the beginning to a renewed bull run. Above 5259 completes a base pattern. Initial resistance is yesterday’s high at 5221, a close above which would continue the improved outlook.

EUR/USD

The near term outlook remains uncertain after the strong corrective candle from payrolls Friday. However, the mildly positive candlestick from Monday helped to stabilise what could have become stronger dollar momentum, and this has been followed by mild gains once more this morning. There is still a risk of a corrective move with the MACD and Stochastics lines both threatening to cross lower, however the RSI remains positively configured. The key support of the latest breakout at $1.1711 remains intact despite the volatility of Friday’s session. Triggers for a correction would be the RSI dropping below 60, with Stochastics and MACD lines confirming a cross lower. It is interesting to see that the hourly chart is still questioning the control, and if the hourly RSI continues to fail under 60, with the MACD lines failing around neutral this would increase pressure on the downside. The hourly chart shows that if a rally through the resistance $1.1785/$1.1830 helps to re-engage the bulls for $1.1909. Whilst the key breakout supports remain intact the outlook remains one to buy into weakness.

GBP/USD

Sterling remains under pressure as the legacy of the two strong bearish candles continue to weigh on the outlook. The broken six week uptrend has come with the Stochastics tracking lower and a bear cross on the MACD lines. This is the first bear cross since May when the market proceeded to move to the downside for six weeks. However, the sellers are not in control quite yet, with the support of the old breakout range $1.3000/$1.3050 still intact. This protects the late July low at $1.2930. Yesterday’s very tight candlestick (50 pips) and shows the bulls failing to grasp back control which suggests the legacy of the recent sterling weakness remains an issue. The hourly chart shows a series of lower highs and lower lows, whilst the hourly momentum indicators are increasingly negatively configured. Initial resistance is yesterday’s high at $1.3060 but a failure under $1.3110 would be another concerning signal for the bulls.

USD/JPY

The market has once again failed to sustain a move to breakout decisively above the near term resistance at 111.00. Despite having broken the four week downtrend, the bulls have so far been unable to gain control. The momentum indicators are threatening to bottom out but as yet there are no signals that the buyers are taking over yet. This would be seen on a close above 111.00 in conjunction with a series of bullish signals on the momentum indicators. A successful breakout would complete a small base that would imply around 120 pips of gains and therefore the late July high at 112.20 would be prime for a test. However, the early move today is already below yesterday’s low as the yen begins to strengthen again. The hourly chart shows a near term pivot at 110.60 is breaking this morning but there is still the potential for a base reversal pattern if the bulls an mobilise again. The hourly momentum indicators are suggesting a range play under 111.00 but a consistent move below 110.60 today would bring the key lows between 109.82/110.00 back into focus.

Gold

There are questions still being posed over the near term outlook. The broken four week uptrend and move below $1260 suggests that the bulls are no longer in control. However the market has spent the time since Friday’s breakdown in contemplation. One broken, the old $1260 pivot becomes a basis of resistance and this still seems to be a near term watershed. Another failure below today will again play into the corrective outlook. The momentum indicators are in the process of rolling over, with the Stochastics already having crossed lower. Friday’s low at $1254 was at a previous low on the intraday chart and will be seen as another indication. A move below $1254 suggests a $1240/$1260 range play at least. The hourly chart shows a near term pivot at $1265 which was previously supportive and will also be seen as resistance now. The bulls need to break above $1265 to be re-engaged.

WTI Oil

The market consolidation continues, however this is a very choppy consolidation which is increasing the importance of the next breakout. A run of 6 successive contradictory candles has been completed after Monday’s negative close candle followed a bull move on Friday. This is bolstering the importance of the support at $48.37 and resistance of the $50.43 high from last week. It is interesting to see the RSI tailing off in this consolidation, back below 60, whilst the Stochastics are also beginning to threaten lower. For now this is merely a consolidation however the hourly chart reflects on the fact that this has turned into a potential top pattern, with a close below $48.25 completing the top. Hourly momentum suggests a continuation of the consolidation range, whilst trading below a pivot at $49.25 gives the market a mild bear skew. Resistance is now $49.75 and $49.95. This looks to be a market to play the range until the break, at which there is likely to be a decisive move.

Dow Jones Industrial Average

There is still no sign of any real let up it he rally on the Dow as a tenth consecutive positive close was posted yesterday. This has also been the ninth consecutive all-time closing high ever since the push out above 21,681. The session itself was though more of a consolidation, with little direction or conviction on a quiet day of just a 40 tick range. Normal practice would be to question the strength of the trend continuation. However the RSI remains so strongly positively configured at 77 and there is as yet no real sign of a reversal. The market has made higher session lows and highs in each of the past ten sessions now, and until that sequence is broken the bulls will still remain in control. The momentum on the hourly chart remains strong, whilst even the hourly MACD lines seem to be ready to turn higher once more.


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