With the US economic data again pointing to strength this week the lack of any sustainable recovery on the dollar will be perturbing the bulls. Hot on the tracks of an upside surprise in the ISM Manufacturing data, the ADP Employment change jumped by 250,000 to smash expectations of 190,000. Although treasury yields ticked higher, the dollar failed to rally and ultimately came under pressure. The FOMC minutes reflected a hawkish desire but concerns over subdued inflation persist and these continue to cramp the dollar bulls. The market will therefore be looking at today’s Non-farm Payrolls report in a different light and wage growth is key now as stronger wages feed into inflation. Wage growth stalled in the latter stages of 2017 and is currently around 2.5%. Treasury yields and the dollar would be boosted if wages start to tick decisively higher. A solid, if not strong, headline payrolls jobs growth is increasingly likely now given the ADP number, but it is wage growth that would really push the needle. Before that the market will also have the December Eurozone flash inflation reading which is expected to show an uptick in core inflation. If this beats expectations to the upside then the dollar could come under even more pressure.
Wall Street once more closed in strong all-time high territory last night with the Dow closing above 25,000 and the S&P 500 +0.4% at 2724. Asian markets also continues to pull higher on the positive market sentiment, with the Nikkei +09%. European markets are reacting positively to the continued strength of market sentiment. In forex, the positive market sentiment is a drag on the safe haven Japanese yen, whilst the dollar is just beginning to find some support ahead of the December jobs report. In commodities, gold has just pulled back by $5 after rebounding strongly yesterday, whilst oil is consolidating the strong recent gains.
The first week of the month is packed with key economic data but the big focus is always Non-farm Payrolls. However first up today trader will be watching for the flash Eurozone CPI inflation at 1000GMT which has been held back due to the holiday period (usually it comes out around the turn of the month). Headline CPI is expected to drop slightly to +1.4% (from +1.5%) whilst the core CPI is expected to show a mild tick higher to +1.0% (from +0.9%). The big volatility will come from the US Employment Situation report which is at 1330GMT. Non-farm Payrolls are expected to drop back to 190,000 from last month’s 228,000 however after the ADP employment jumped to 250,000 yesterday there may be elevated anticipation of an upside surprise. However the headline number is becoming increasingly less relevant as the market intently watches the Average Hourly Earnings for signs of wage growth. Expectation is for earnings to grow by +0.3% for the month (+0.2% last) and +2.5% for the year (+2.5% last month). Unemployment is expected to stay at 4.1% again, whilst the U6 underemployment is always worth watching having ticked higher to +8.0% last month (from 7.9%). Aside from payrolls, the market will also be watching out for the ISM Non-Manufacturing data at 1500GMT which is expected to tick higher to 57.6 (from 57.4) whilst Factory Orders are expected to grow by +1.1% form the month (-0.1% last).
Chart of the Day – NZD/USD
The recovery in the Kiwi against the US dollar has been impressive in the past few weeks. The market bottomed at $0.6780 in November but the rally from $0.6820 in early December has now added well over 300 pips and over 4.5%. Ahead of Payrolls, the market is now testing a key band of resistance between $0.7130/$0.7200. These were key supports from Q3 2017 and the $0.7200 has since become a key level of resistance for a pullback in October. The recent rally has once more posted a strong bullish candle to take the market to an 11 week high, whilst also maintaining the support of a four week uptrend (that comes in today at $0.7080. The momentum indicators retain a strong configuration as the rally has moved higher, with the RSI above 70 at a 5 month high and the MACD lines also strong. Yesterday’s breakout has left good support now at $0.7070 with a band of support $0.7070/$0.7130 now a basis for a near term buy zone. A continuation of the move for a close above the $0.7200 resistance would be a key upside break for the Kiwi bulls and mark a significant shift in medium term sentiment again as it would be confirmation of a new bullish medium term trend formation.
The euro is knocking on the door of a breakout but is yet to make the move. Twice this week the market has made a run towards the key September high of $1.2092 only to drop back again. Yesterday’s strong bull candle contained the highest close since December 2014, however the intraday resistance remains in place, for now. Once more the market has just dipped back again, which may be an air of caution in front of Non-farm Payrolls, however corrections continue to be seen as a chance to buy on EUR/USD. The momentum indicators are positively configured with the RSI still hovering between 65/70 whilst the Stochastics and MACD lines are strong. Initial support is with this week’s low around $1.2000 with further support between the old breakouts $1.1940/$1.1960. Unless the payrolls report is unambiguously strong, then look to use volatility in a correction for a chance to buy today.
The market has been choppy this week but seems to be moving into today’s payrolls report with a degree of traditional consolidation on Cable. The outlook on a technical basis remains positive with the market supported above $1.3500 throughout this week and looking to build a new basis of support following the breakout above the December resistance $1.3520/$1.3550. However, although momentum indicators are strong they perhaps lack the impetus needed for an immediate and sustainable push higher. The rolling over of the Stochastics will be a concern, however near term corrections on Cable has continued to be seen as a chance to buy. There is now a sharper 8 week uptrend which currently comes in around $1.3430 today and will be seen as a basis of support for any retreat should there be a strong payrolls report today. Initial resistance is at $1.3612 which protects the key September high at $1.3655.
The one major pair that the dollar is making serious ground in a recovery is USD/JPY. The positive risk appetite of the early days of 2018 have hit the yen and subsequently the pair has posted a couple of positive recovery candles in the past couple of sessions and continued the move higher today. This means that the range of the past five weeks continues between 112.00/113.75. Furthermore today’s strong move to the upside has taken the market back above the medium term pivot at 113.00 to give the range a more positive outlook again. The market seems to be positioning for a solid and perhaps even strong payrolls report today as a gain of over 40 pips has been seen early in the session. The range highs 113.65/113.75 are back within reach again, but a decisive breakout would need the RSI above 60 to really suggest any move is sustainable. The hourly chart shows a and of support is now around 112.80/113.00.
The gold bulls have responded extremely positively to the first real threat to their control. Yesterday’s rebound from an intraday low at $1305.60 closed at a three month high and continues to reflect the strength of the gold bulls. Interestingly this seems to be the market supporting at the breakout of the old October high, however, furthermore this now means that the bulls have seen a dip into the long term pivot band $1300/$1310 twice in the past two sessions as a chance to buy. Today has seen the market dropping back again as the dollar has hinted as a slight recovery again in front of payrolls. The momentum indicators remain positively configured but with the choppy moves of recent sessions, the configuration has lost some of its impetus. Despite this the RSI remains around 70, the MACD lines are rising strongly. The drift lower on the Stochastics is a concern but they still remain in strong territory. The three week uptrend supports the market today around $1300 and near term corrections remain a chance to buy. With the continued support above $1300/$1310 the outlook remains positive for further recovery towards the next minor resistance at $1334 whilst there is little real resistance until $1357.50 now.
Another two and a half year high on WTI yesterday reflects the strength in the market as the run within the uptrend channel continues. The move yesterday has peaked at $62.20 before a slight dip back early today, but for now corrections continue to be seen as a chance to buy again. The key resistance from May 2014 comes in at $62.60 and this could begin to limit the advance a touch. A correction would be a healthy unwind of momentum and it will be interesting to see how the hourly chart reacts should a move below initial support at $61.60 be seen today. The hourly RSI has been supported between 35/45 throughout the bull run and MACD lines positive. There is good support for a near term correction at $60.00/$60.75.
Dow Jones Industrial Average
Another strong bullish move on the Dow has taken the market clear into all-time high territory once more. The start to 2018 has been extremely positive and the strength of the momentum suggests there is little reason not to back further gains. Very little regard has been given to the key psychological 25,000 barrier with the market breezing straight through yesterday. The bulls are now well positioned moving into Non-farm Payrolls with MACD lines looking ready to cross back higher again whilst RSI and Stochastics ticking higher again in strong configuration. The hourly chart shows strong momentum configuration although a touch extended on the hourly RSI. There is now initial support with yesterday’s traded low at 24,963 with a band of support 24,875/24,940.
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