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Risk positive, dollar corrective after mixed payrolls

Market Overview

The signs of a potential correction on the dollar have turned into something more tangible in the wake of Non-farm Payrolls on Friday. After a labor market report that suggested decent jobs growth but the continuation of restricted wage growth, there was little to push for a more hawkish view on the FOMC. With average hourly earnings of 2.7% coming in below CPI of 2.8% and unemployment ticking two tenths of a percent higher, this is not the condition for moving more aggressively on rates. This has been positive for risk positive and positive for equities, whilst Treasury yields remain subdued and the 2s/10s spread (which reflects the steepness of the yield curve) continues to decline, now below 30 basis points. The US dollar has lost ground as a result, with EUR/USD moving above a key near term resistance at $1.1720 as the Dollar Index confirms a broken uptrend of the rally since April. Watch out for gold closing back above $1261 as this would be another signal of impending dollar correction. Sterling has its own Brexit-related issues to sort out after a topsy turvy weekend. Initial good news for an apparent united UK cabinet for a fairly soft Brexit approach (which would be sterling positive) has been muddied by the resignation of (harder Brexit supporting) minister in charge of leaving the EU, David Davis. It is likely that traders will take this with a pinch of salt (Davies was a fairly unimpressive and rather divisive figure) and move on quickly, but could mean a degree of volatility today.

Dollar thumbs down

Equities look positive after Wall Street closed Friday with decent gains (S&P 500 +0.8% higher at 2760), futures are +0.3% higher helping to pull Asian markets forward (Nikkei +1.2%) and European markets are decently higher in early moves. In forex, the risk positive and general dollar weakness has continued into today, with gains on the Aussie and euro, whilst the strength of sterling is remarkable, whilst the yen is a slight underperformer. Gold is taking advantage of the dollar weakness and is pushing on resistance, whilst oil has also regains a touch of upside momentum.

There are no key economic releases due today.


Chart of the Day – AUD/USD   

The dollar turning more corrective and the Aussie seemingly finding a degree of support is having a positive impact on AUD/USD which could now see the market retracing within the five month downtrend. In the past few sessions, there has been a broken four week downtrend and the market has now formed a base pattern. The resistance at $0.7445 has been a pivot in recent weeks but an intraday breakout above the barrier this morning has completed a three week base pattern and imply a recovery target of 100 pips (perhaps up to 130 pips) of further recovery. A close above $0.7445 confirms the move. The improvement is really being seen through the momentum indicators with the RSI calling the three week breakout, whilst the Stochastics are accelerating higher and the MACD lines have completed a bull cross. Momentum indicators are certainly leading the market higher. There is a higher low at $0.7360 above the $0.7310 key low now. The five month downtrend is way up at $0.7590 so there is plenty of room for the recovery if the closing move above $0.7445 can be seen.



The improvement in the euro continues and Friday’s breakout above the resistance at $1.1720 completes a near term breakout that now implies a move higher to test the key medium term resistance at $1.1850. Momentum indicators are all leading the market higher, with the RSI rising above 50 at the highest since late March, the MACD lines rising closer towards neutral at two month highs and the Stochastics pulling into strong configuration. There is a mini uptrend that is supportive at $1.1690 today whilst the previous breakout resistance at $1.1720 now becomes a basis of support. The hourly chart shows the momentum is strong and intraday corrections are a chance to buy.



The recovery on Cable is similar to that of the euro, however is just slightly less technically advanced. The mini uptrend is now into its eighth session running daily higher lows and the momentum indicators continue to improve. The RSI is rising above 50 at its highest since late April, whilst the MACD and Stochastics lines are also positively configured. Technically, the market is set up to test the initial resistance at $1.3315 which is the first real test of a lower high within the sell-off of recent months. This is subsequently a key moment for Cable bulls. The politics of Brexit are a volatility factor today and how the market responds to the resignation of UK Brexit Minister David Davis will be key to this potential test of $1.3315 today. A closing breakout opens $1.3450 which is the key medium term resistance. There is near term support at $1.3255/$1.3275 but the $1.3200 pivot is increasingly important now.



The mixed signals of recent days continue to develop and throw the control of the bulls into ever further doubt. The prospects of a breakout above the resistance band 111.00/111.40 seem to be waning as the market has posted three negative candles in the past four sessions. This is playing into the muted momentum signals where the RSI is stuck between 50/60 and the MACD lines in the doldrums a shade above neutral. The bull bias is still present on a medium term basis and this means the market is gravitating towards the range highs, but a breakout does not look to be forthcoming, at least not yet. Initial support is at 110.25 which is last week’s low, whilst there is some semblance of a pivot on the hourly chart around 110.00. Subsequently, any closing price with a 109 handle would now be a disappointment, opening 109.15. The hourly chart looks stuck in a range.



The market continues to consider the prospects of a near term recovery. Having picked up nicely early last week, the gold bulls have spent recent sessions umming and arring over a rally but never making the move. However, momentum indicators are now beginning to call for a recovery, with the RSI rising above 40, Stochastics rising and MACD lines posting a bull cross. There is a pivot band of resistance at $1260/$1261 that is broken on a closing basis would complete a small base pattern and imply around $22 of further rebound. This would bring gold back into the overhead supply around $1282. The hourly chart is positively biased on a near term basis and tentatively calling the market higher. The importance of near term support around $1250 is growing for the potential of a recovery.



The market responded well to Thursday’s negative candle with a bull reaction off a low at $72.15 on Friday to close with a bull candle back above the $72.85 old breakout. Can the move now begin to gather the bulls for renewed upside again? The market has been threatening a corrective move with the turn lower on the momentum indicators but has failed to so far ignite. A bear cross on the Stochastics has yet to be confirmed as a sell signal and the RSI turning back from 70 so far remains above 60. If the bulls can hold on to early gains today and post a second positive candle then the outlook will again look to improve. The key will be the resistance of last week’s high at $75.25 as a closing breakout resumes the pull higher. There is a stretched feel to indicators such as MACD lines and Bollinger Bands, but calling a top is always a very difficult process to get right. It could also take a while before any corrective force really begins to take hold. Key support now at $72.15 with the old breakout $72.85 again a gauge.


Dow Jones Industrial Average

The consolidation symmetrical triangle that has been holding back any direction over the past couple of weeks has been broken to the upside. This now increases the prospect of this turning into a recovery play once more. The key resistance will continue to be the 24,570 reaction high which is the first key reaction high within the June correction. Having broken the near term downtrend, If the recovery can now continue to build within what is now a near term uptrend, then a realistic challenge of the resistance can be seen. This comes with what is now an improvement in the momentum indicators as the Stochastics edge above 20, RSI bottoms out and even the MACD lines show signs of ticking higher. A closing break above 24,445 now eyes the resistance at 24,510 which protects 24,570. A sustained recovery will also have the bulls thinking about a breakout above 24,570 which would complete what would be a two week base pattern.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.