Last updated: May 3rd, 2017 at 09:59 pm
- The performance of the US dollar seems to remain key across financial markets as the greenback strength once again starts to show through. Key markets such as the euro and gold are beginning to show renewed dollar strength after the unwinding correction in the wake of the FOMC meeting. This is impacting across FX majors, commodities and also could once more act as a drag on equity markets.
- Markets apparently remain data dependent, with the strong US data of yesterday (better core Personal Consumption Expenditure and better Pending Home Sales gave the dollar a boost.
- This is a huge week of data which has started already with dollar positive data. The ISM manufacturing and Non-farm Payrolls data could provide increased dollar volatility. The ISM is expected to show a 4th month of decline which would not help the dollar (there is a positive correlation between the ISM and US growth), whilst the Non-farm Payrolls are expected to show a further 244,000 jobs have been added in March, whilst average hourly earnings (c. 2.0% run rate for the past 12 months) is set to remain around flat. Watch out on Friday as markets will be thin for Non-farms (due to Good Friday public holiday in many major markets), so this could mean extra volatility.
- Also watch out for any FOMC members comments. Dennis Lockhart and Janet Yellen both moved markets considerably last week as traders pay ever closer attention to key rhetoric.
- It will be interesting to now see whether the market positive reaction (with equity markets reacting WITH the positive data) rather than the usual negative reaction (due to fear of the impact on potential Fed tightening) will continue. The futures are lower today as the dollar strength has continued and with the yen outperforming all forex majors (a suggestion of a preference for safer haven assets), it is difficult to see this as a positive development yet. The fear still remains.
- The fact that Treasury yields have not yet broken back higher (i.e. they are still consolidating the recent correction) just leaves me a touch cautious on the renewed dollar rally though. Interesting that 2.00% is a key pivot level on the US 10 year yield and this remains a near term resistance.
- The Dollar Index (DXY) completed a bullish key one day reversal (technical buy signal) on Thursday and this was confirmed by a strong close yesterday, whilst today’s gains also suggests that buying into any pullback on the dollar seems to be the near term strategy.
- In other events, markets still wait for real progress on the reform proposals for Greece which are yet to be agreed. EU officials suggest that an agreement could be announced in the next day or so.
- Also the lifting of nuclear sanctions on Iran could have significant impact on the oil price (leading to an increase in supply) if this is agreed by the US.
- Watch for: US ISM Manufacturing, Non-farm Payrolls
EUR/USD – Rally has run out of steam and now looking to sell rallies again
- Despite some decent Eurozone data in recent days (further signs of improvement in the German data as inflation continues to pick up again, whilst the Eurozone CPI has now risen for 2 months in a row). However it is all about the US data (ISM and Non-farms). Positive US data surprises are having a strongly negative impact on EUR/USD.
- Technically supports are coming under continuous pressure and are being broken now. The breach of the support band $1.0766/$1.0800 is the latest breakdown in a move that re-opens the $1.0612 support. Selling into rallies looks to be the strategy now with the resistance around $1.0800 looking ideal for a likely re-test of the lows again.
- Watch for: ISM Manufacturing, Non-farm Payrolls
GBP/USD – The loss of support at $1.4800 has re-opened the lows once more
- The prospect of a messy General Election with significant uncertainty over the eventual winner and potential government composition is likely to drive downside pressure on Cable. Wednesday could be volatile with significant focus on manufacturing PMIs from both UK and US. Non-farm Payrolls will also add to the volatility, whilst with the UK on public holiday both Friday and Monday for Easter, the early part of next week could also be very choppy.
- Cable has still been unable to breach the key resistance band $1.4950/$1.5000 has since broken below a 200 pip band to suggest a test of the lows at $1.4633 is increasingly likely. The sequence of lower highs on the intraday chart suggests rallies are being sold into at lower levels. The resistance band $1.4800/$1.4850 looks to be a good selling zone now.
- Watch for: UK Manufacturing PMI, ISM Manufacturing, Non-farm Payrolls
USD/JPY – A confirmed breach of 119.40 opens 118.30
- Despite yesterday’s sharp move higher on the dollar there is still a sense that the fact that the yen is still in demand there is a more negative slant to general market sentiment. Dollar/Yen is far more of a medium/longer term range play than other markets which show the dollar being far stronger. There is still room for trading within this band though and there is a slight dollar positive bias still.
- The breakout above 119.40 leaves open the prospect of a retest of the resistance at 121.20. Another higher low above 118.90 would also add to the argument. The bulls have regained some confidence after the strong day on Monday. An ideal near term buying zone comes around 119.40/119.75.
- Watch for: ISM Manufacturing PMI, Non-farm Payrolls
Gold – The bulls have lost control as the selling pressure resumes via the renewed dollar strength
- The stronger dollar is weak for gold as the negative correlation continues to ring true. The gold price has been slammed on the past two positive Non-farm Payroll reports, both losing around $40, so be aware of this on Friday.
- There is a succession of supports that have been left during the rally that are now being broken. This would suggest that with the sequence of lower highs now, selling into strength is the way to go.Ideal selling area is around $1185/$1190, but still possible up towards $1200. The bulls have fought back on a rally above $1206.20.
- The Gold/Silver ratio has picked up once more in the favour of gold. But this is not necessarily a positive for the yellow metal as silver is just being hit proportionally more than gold
- Watch for: US CPI, US new home sales, US GDP
Indices – Fear of Fed tightening still impacts Wall Street & subsequently FTSE
Despite a day where the dollar rallied alongside Wall Street this has been an exception rather than the rule. Outside earnings season, equity markets seem to be frightened by what the impact of a sronger dollar is having on US corporate results. The stronger dollar is also impacting on commodity prices which have heavy weightings on FTSE 100 especially but also on Wall Street. The DAX has tended to be reacting with a Euro correction but perhaps after over 20% of gains in 2015 the profit takers are contemplating a move.
- S&P 500 – Ranging now between 2040/2120.
- DAX Xetra – The big uptrend has been broken and this is becoming a bit of a messy period of trading as the consolidation sets in between 11620/12219.
- FTSE 100 – The strong gains on FTSE 100 are being corrected now as the index looks to retreat back into the support band 6700/6800.
WATCH OUT FOR THIS WEEK
Tuesday 31st March
- Canada – GDP
- US – CaseShiller Home Prices
- US – Consumer Confidence
Wednesday 1st April
- China – Manufacturing PMI
- Eurozone – Manufacturing PMI
- UK – Manufacturing PMI
- US – ADP Employment Report
- US – ISM Manufacturing PMI
Thursday 2nd April
- UK – Construction PMI
- US – Trade Balance
- US – Weekly Jobless Claims
Friday 3rd April
- China – Services PMI
- US – Non-farm Payrolls
- US – Average Hourly Earnings
Monday 6th April
- US – ISM Non-Manufacturing PMI
Tuesday 7th April
- Australia – RBA monetary policy
- UK – Services PMI
- US – JOLTS job openings
Wednesday 8th April
- Japan – BoJ Monetary Policy & press conference
- US – Crude Oil Inventories
- US – FOMC meeting minutes
Thursday 9th April
- UK – BoE Monetary Policy
- US – Weekly Jobless Claims
Friday 10th April
- China – CPI
- Switzerland – Unemployment
- UK – Industrial Production
- Canada – Unemployment