US dollar makes a move out but can the move be sustained

Market Overview

Many European countries were on May Day public holiday yesterday and the US dollar bulls have used the opportunity of thin markets to break through some key levels. This comes as safe haven plays such as the yen, gold and US Treasuries have suffered. The question is whether this break on the dollar can be sustained. A move on the dollar came in response to the prospect of increased issuance of ultra-long bonds in the US, which drove Treasury yields higher. However, this move of dollar strength flew in the pace of disappointing economic data. As traders look forward to the Fed this week, US data continues to come in shy. Inflation still remains a struggle, with core Personal Consumption Expenditure disappointing yesterday. Falling from 1.8% to 1.6% in March, the core PCE has retreated back from the Fed’s 2.0% target. Add in US ISM Manufacturing falling back to 54.8 a big miss of the 56.5 expected and this could impact on expectations of a Fed rate hike. The reflation trade has been questioned in recent weeks, and the disappointing reading of China Manufacturing PMIs overnight will not help. China’s final Caixin Manufacturing PMI was 50.3, worse than the 51.2 that had been forecast and lower than 51.2 that had been forecast.

dollar strong yen weak

Wall Street closed mixed last night with the US banks suffering after suggestions that President Trump would be preparing new legislation along the lines breaking up the banks. The S&P 500 closed +0.2% at 2388, whilst Asian markets were also mixed (Nikkei +0.6%). European indices look to be trading mildly higher this morning. In forex, there is a mild unwind on the US dollar, but the yen remains weak. Gold is trading around flat, whilst oil is lower again.

With European markets closed for May Day holiday yesterday there is a raft of manufacturing PMIs that traders will be focusing on throughout the morning. The final Eurozone Manufacturing PMI is announced at 0900BST and is expected to remain at a strong 56.8 (last month 56.2). The UK Manufacturing PMI is at 0930BST and is expected to tick mildly lower to 54.0 (from 54.2 last month). New Zealand unemployment is at  2345BST and is expected to improve slightly to 5.1% (from 5.2% last quarter).

 

Chart of the Day – NZD/USD

Last week the Aussie came under a lot of pressure, breaching key supports on major crosses and the Kiwi has looked to be following suit. However, with the NZD/USD pair seemingly at a crossroads moment, the bulls are responding. The support band $0.6860/$0.6900 has been a key pivot for several months and although being breached on an intraday basis last week, the market never closed below the support and now yesterday’s strong bull candle has questioned the stamina of the bears. This comes as the momentum indicators have started to tick higher again, with the RSI and Stochastics turning higher. Is this a recovery play? Following yesterday’s positive close above $0.6900 the bulls need to continue the recovery again with another bull candle today. The early signs are fairly positive with a move above Monday’s high of $0.6923. That re-opens resistance at $0.6980. The hourly chart shows an improvement in hourly momentum but this recovery needs to close above $0.6920 to really suggest a bull recovery is underway. A failure back below $0.6860 would re-open the downside with the next real support being the May 2016 low at $0.6675.

EUR/USD

With the major Eurozone countries closed for May Day yesterday there was little direction to speak of. The daily candlestick shows a range of just 40 pips and almost flat on the day. This simply continues the consolidation of the past week where the euro has continued to hold on  to the support at $1.0850 but cannot muster the momentum to drive a break above $1.0950. So a 100 pip band is in place. There has been a very mild positive bias to trading this morning but as yet there are no signs of a break of the consolidation. Daily momentum indicators remain strongly configured enough to suggest that corrections remain a chance to buy. If there were to be an unwinding move, trading above the support band $1.0800/$1.0850 retains a positive outlook, whilst a correction would set in below $1.0777. The hourly chart shows a market looking for direction.

GBP/USD

Sterling remains bullishly configured with the acceleration higher from the original breakout above $1.2775. However with the RSI reaching over 70 recently (the highest level in almost two years) the immediate upside potential looks technically a touch limited. Cable hit the buffers a touch yesterday (with the UK on May Day public holiday) posting a negative candle that closed at the low of Friday’s session. However corrections should be considered to be a chance to buy. The hourly chart shows a band of support between $1.2865/$1.2890 which will be watched and whilst holding above $1.2805 the outlook remains strong. A close below $1.2775 would change the outlook back towards a corrective move, but for now the bulls remain in control. A move back above Friday’s high at $1.2965 should be expected still with the psychological $1.3000 likely before resistance at $1.3060 and $1.3120 comes back into play.

USD/JPY

The pair has broken out above the 111.60 key pivot resistance. The first observation to make is that this break has been building for a while and if confirmed would be signal a change of outlook. The break of the original support at 111.60 in late March was followed by a pullback which found resistance at 112.20. Subsequently this resistance at 112.20 needs to be broken to confirm the move. However, it is also important to note that this move was also on the lowest volume day since the turn of the year and therefore needs to be caveated. Trading today therefore becomes very important to see if the market accepts the break. Technically, the momentum indicators are all rising strongly and with upside potential, whilst the RSI is at a four month high. The hourly chart shows little reason not to believe that the breakout will not continue, with a series of higher lows. Support is at 111.40/111.60. A closing breakout above 112.20 is the bullish confirmation.

Gold

After almost a week of testing the support at $1261, the market broke down yesterday and this continues the recent corrective slide. A closing move below $1261 now opens the support of the old pivot around $1240 which now becomes a realistic next target. The momentum indicators are all falling away and the market is very much in correction mode. The bears would though still probably like a second daily close below $1261 to confirm the breakdown (due to light trading volumes yesterday). The previous support at $1261 is now a basis of resistance today, with $1268.50 a further level of resistance. Support now comes in at $1252.90 and then $1247.00.

WTI Oil

The resistance band between $49.60/$50.00 remains a key factor in the market direction and yesterday’s bear candle followed a rebound on Friday that failed in the resistance. This now confirms the bearish outlook and re-opens a test of the support at $48.20. A close below $48.20 would be a five week low and drive expectation of a test of $47.00 support. The momentum indicators are set up with bearish configuration suggesting that rallies should continue to be seen as a chance to sell. That means that the resistance band $49.60/$50.00 would remain key, whilst the hourly chart shows that there is further resistance $49.30/$49.50. The bears will remain in control whilst last week’s reaction high at $50.20 remains intact.

Dow Jones Industrial Average

The Dow continues to tail off under the old resistance at 21,000 as the traction in last week’s strong recovery wanes. The past four daily candles show continued failure of the bulls as a consolidation has set in. The question is whether this will turn into anything more bearish. The support of the reaction low at 20,909 was just breached by yesterday’s low, but the market managed to hold up on a closing basis. The daily momentum indicators have rolled over, but for now this looks like a consolidation. A close below 20,909 would increase the downside pressure for a correction, back towards the medium term pivot at 20,777. However, the hourly chart shows this recent drift lower to be a move that is helping to unwind excessive upside momentum, especially with the MACD lines having retreated back to neutral. Therefore, a supported drift back towards 20,777 would be seen as a positive move that would be a chance to buy. The bulls would then be eying the resistance at 21,006 above which would help to avert thoughts of a correction and re-open the high at 21,071.


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