The recent run of dollar strength is showing signs of exhaustion as some near term reversal signals are now threatening. This comes as the market continues to speculate over who might chair the FOMC after current chair Janet Yellen’s term finishes in February. Following the September FOMC meeting, the market has all but priced in the next Fed rate hike for December. So the upside potential for this seems to be a little limited. The steam from the initial proposals from Donald Trump’s tax plan has gone out of the market (for now) and traders are focusing near term on the Fed chair. Monday’s rally came on the back of speculation that a hawkish Kevin Warsh was a front runner. However, clearly there would be other options being considered and Jerome Powell has also been spoken to. Powell seems to have similar views to incumbent chair Yellen and is subsequently far less hawkish than Warsh would be. Treasury yields have ticked lower and the dollar is off its recent highs as the market just reins in a touch. This is a near term correction for the dollar (for now), and with Non-farm Payrolls just a couple of days away, the move is likely to be short-lived. European focus is more on events in Spain as the prospect of independence in Catalonia is growing and could be a drag on sentiment.
Wall Street continues to remain bullish with further all-time highs for the S&P 500 which was +0.2 at 2534. The Nikkei was slightly higher at +0.1% whilst European markets are mixed in early moves, with the DAX playing catch up from yesterday’s public holiday. In forex markets, there is an unwind of the recent dollar strength against all the majors today. Sterling will be in focus after UK Brexit minister David Davis talked about contingencies for “no deal” again and Theresa May’s key note speech today. In commodities, gold is being supported by the correction on the dollar, whilst oil is lower again as the recent correction takes on further momentum.
For the economic data, the focus for today will be on the services PMIs, however don’t forget the key central bankers towards the end of the session. The early part of the day will be the European PMIs, with the final Eurozone Services PMI at 0900BST which is expected to confirm the flash reading of 55.6 (which would be up from 54.7 last month), whilst the final Eurozone Composite PMI is expected to be 56.7 which would be up from 55.7 last month. The UK Services PMI is at 0930BST and is expected to remain at 53.2 (this is the important number for the UK economy with services accounting for around 80% of GDP). The US ISM Non-Manufacturing is at 1500BST and is expected to tick mildly higher to 55.5 (from 55.3 last month). The ADP Employment change is at 1315BST and is expected to be strongly down to 130,000 from 237,000 last month. This will be an interesting gauge of how the recent hurricanes could impact on Friday’s Non-farm Payrolls. The EIA oil inventories are at 1530BST and are expected to show crude stocks in drawdown by -1.5m barrels (last week -1.9m barrels), distillates in drawdown by -2.0m barrels (last week -0.8m barrels) and gasoline with a build of +1.0m barrels (last week +1.1m barrels of build).
Chart of the Day – EUR/GBP
After such considerable recovery gains in September, Sterling is suddenly coming under strain. We focused on Euro/Sterling last week with the market back at the key confluence of long term support (long term uptrend and support at £0.8740). However, the support held firm and a succession of positive candles in recent days the market has pulled the pair higher as sterling has underperformed. This rebound is now testing the key pivot of the past few months at £0.8880. A closing break through £0.8880 looks to form a base pattern which would be confirmed on a move above £0.8900. Momentum indicators are now looking to decisively pick up with the RSI confirming a recovery, Stochastics turning higher with a crossover buy signal and the MACD lines also crossing higher. A closing breakout above £0.8880 implies 130 pips in the near term towards a test of £0.9000 again. The hourly chart also reflects the recovery with positive configuration on hourly momentum and a run of higher lows this week above £0.8745 at £0.8800 and £0.8820. Moves to unwind the hourly RSI to 45/50 is a chance to buy now.
We are suddenly seeing questions asked of the strength of the dollar as the market has picked up from $1.1695. For now this looks to be a consolidation within the decline on EUR/USD but if the bulls can push decisively back above $1.1820 then the outlook will suddenly begin to look more positive. For now the momentum indicators are consolidating in their negative configuration, with the RSI hovering between 40/50, Stochastics hovering under 20 and MACD lines having just gone below neutral. However this seems to be a moment for caution as the negative outlook could now easily turn around. Watch the momentum indicators on the hourly chart. If the hourly RSI starts to move towards and above 70 then there could be something in a near term rally. The hourly chart also shows that $1.1830 resistance is now key. Initial support at $1.1730 today.
Is this early morning consolidation a pause for breath or something more considerable for the bulls? The selling pressure has now achieved the 200 pip downside target of $1.3250 and the support is beginning to form around the 50% Fibonacci retracement of the 2016 Brexit sell-off (at $1.3247) along with the breakout support of the August high at $1.3265. Near term momentum remains corrective and the reaction in the next couple of sessions could be key for the medium term outlook. If the market consolidates and then continues lower, then the market could fall back further towards the $13050 medium term support. Support at $1.3220 will become increasingly important. For now though this move needs to be treated as a consolidation, as the hourly chart simply looks to be unwinding within the bearish configuration of the sell-off. Initial resistance is $1.3285 from yesterday’s high, whilst there is overhead supply at $1.3350. Watch for the Services PMIs for both the UK and US today adding volatility to the session.
For the past couple of days I have been talking about the trend higher losing momentum, as the MACD lines are converging. The market failed to break through the 113.25 high yesterday and for a second consecutive session in a row, closed below the mid-point of the daily candlestick. This suggests that the bulls are losing conviction and the early move lower today adds to that assertion. This could once more be part of the formation of the bull run, however the buyers have certainly lost impetus in recent sessions. The support at 112.20 takes on added importance and needs to be watched today. The hourly chart shows a broken 13 day uptrend whilst hourly momentum has now become neutral at best. A move below 30 on the hourly RSI would begin to suggest a more corrective drive is forming. Below 112.20 would complete a small top and imply around 100 pips of downside to 111.20. The first key reaction low is at 111.45 whilst the medium term pivot is at 111.00. A lower high at 112.95 now needs to be breached to help the bulls re-assert themselves.
The market has just picked up in the past few hours as the dollar strength has lost momentum. Leaving near term support at $1267.80 is interesting as the bottom of the $1267/$1278 support band from August that I have been watching seems to have held. However this still simply looks to be a rally within the trend channel lower. There is a succession of lower highs and lower lows whilst rallies have continually struggled around old key levels. The first interesting resistance band is $1277/$1290, whilst it is notable that the downtrend channel comes in around $1290 today. The negative configuration on the momentum indicators has not changed and this continues to suggest using these rallies as a chance to sell. Expect the rally to peter out, with a retest of $1267 and likely further downside towards $1251.
WTI consolidated for much of yesterday’s session however, as with the theme of recent days, the selling pressure is just beginning to show through once more. This is adding downside pressure with the $50.50 old breakout support breaking down. The RSI falling away, the Stochastics accelerating lower and the MACD lines now posting a bear cross have put the sellers in control for now. This is a corrective move that will add to potential for a test of the $49.20 reaction low, which is a key near term level. The concern for the bulls is that a negative configuration has also taken over the hourly chart with the intraday rallies increasingly being sold into. There is also now a resistance band $50.80/$51.25 which is acting as a near term sell-zone. A break back below $50.00 would continue the correction but the $49.20 support is key.
Dow Jones Industrial Average
The Dow is now well on track for achieving the breakout target of 22,675. Momentum is stretched but strong, and in a trending market this is a move to go with. This is reflected in the run of solid bullish candles closing towards the session highs, but also in the momentum. MACD lines have posted a bull kiss, Stochastics are rising and the RSI is running into the mid-70s. The old key high at 22,420 becomes the latest breakout support whilst intraday weakness is clearly a chance to buy now. The market is also not yet even that stretched, with the upper Bollinger Band well over 22,700 and the upper limit of the five month uptrend channel now at 22,760.