- The correction seen on the dollar is now beginning to challenge some key technical levels on forex majors. If these levels are breached then it could open for further moves against the dollar. (However I continue to see this as a counter trend move ultimately leading towards further dollar strength as the policy divergence and the Fed leading the major central banks towards tightening drives the dollar higher.)
- This recent move has all been driven by the Fed maintaining a dovish stance despite the removal of “patience” from the statement. This does make the dollar now open to data dependence. All economic data of any importance will drive volatility. This week is inflation, housing data and final Q4 GDP.
- The surprisingly dovish steer from the Fed (cutting growth and inflation targets) has driven weakness in the dollar and also pushed Treasuries higher. This has impacted across financial markets with key forex majors rallying (especially the euro, yen, Swissy, Kiwi and Aussie), in addition to a rebound in commodities (Gold and Silver sharply reversing, WTI picking up and also base metals such as copper). Many of these are now challenging key levels which need to be breached to continue the move higher.
- The Dollar Index has dropped below its 21 day ma and has already corrected over 3.5%, it is looking increasingly likely to retreat towards the old support band starting at 95.5 (another 1.5% lower). This dollar correction looks set to continue.
- The dollar strength (and subsequent euro weakness) has been a major driver of outperformance of the DAX versus FTSE 100 (due to commodities weakness) and S&P 500 (around a quarter of S&P 500 earnings are in foreign currencies therefore the strong dollar is a negative impact). But now the dollar is correcting this performance is turning round again.
- This weaker dollar is also having a significant impact across commodities which have been under significant downside pressure until recently. This move is unwinding – but for how long?
- In other events, Greece is still yet to provide a great deal of detail for proposals to meet its bailout conditions. The meeting between Alexis Tsipras and Angel Merkel was reasonable but there will need to be some solid proposals otherwise the EU may begin to grow impatient again – which could impact on market risk.
- Watch for: US data releases such as CPI, housing data and a final look at Q4 growth
EUR/USD – Looking towards a test of the key resistance at $1.1098
- The euro had become incredibly oversold and it was almost as though the whole market was looking towards parity. This move is now reversing after the unexpectedly dovish move by the Fed. Ultimately the euro will remain under pressure from the QE programme from the ECB and the Fed’s drift towards tightening.
- Technically the oversold euro position is unwinding, but within the accelerated dollar sell-off of the past 8 months the euro is approaching some key technical levels. With a 3 month downtrend broken the first real test is the old key floor at $1.1098. Momentum is positive in the near/medium term recovery and the euro rebound is continuing.
- Watch for: US CPI, new home sales, US GDP (final Q4)
GBP/USD – Key overhead resistance $1.4950/$1.5000 needs to be breached for the bulls to control a recovery
- The weak UK CPI print showed inflation is now at zero which is a record low. This makes it ever more unlikely for a 2015 rate hike by the Bank of England. This is also continuing the underperformance of sterling as part of the move against the dollar.
- Cable is unable to breach the key resistance band $1.4950/$1.5000 and has been lagging the euro in its recovery. Daily momentum indicators are picking up but there is nothing to suggest the outlook is anything more than a bear market rally yet.
- Watch for: US CPI, US new home sales, UK Retail Sales, US GDP
USD/JPY – A confirmed breach of 119.40 opens 118.30
- The disappointing Japanese flash Manufacturing PMI has done little to impact the correction on Dollar/Yen which continues to pressure downwards in the wake of the FOMC last week. Despite the safe haven status of the yen which would normally be negatively impacted from improved appetite for risk from a dovish Fed, there is yen strength from the dollar weakness. However, there is less volatility on the yen than other reactively higher risk currencies – which is showing through via pairs such as EUR/JPY which is trading higher.
- The confluence of support around 119.40 which is a 2 month uptrend and price support is under increasing strain. A decisive breach would re-open the key medium term support band 118.15/118.30. Momentum has tailed off sharply and moving average support is under pressure too. This could all be indicative of a medium term range play.
- Watch for: US CPI, Japan CPI, US GDP
Gold – Decisive break above $1191 re-opens potential for a medium term bull control
- The sharp gains of the past few days has continued what I see is going to be choppy price action in 2015. The broken 2 month bear trend may now begin to build a new trend again and a decisive break above the key resistance at $1191 would back this view.
- There is still a negative correlation between the dollar and gold and so any key positive economic data surprise will have a potentially negative impact on gold.
- There has been an interesting sharp downside move in the Gold/Silver ratio in the past few days and this shows that silver is beginning to outperform gold once more (at least in the near term).
- Watch for: US CPI, US new home sales, US GDP
Indices – Equity markets will continue to trade on the dollar performance
As the dollar has corrected the S&P 500 has jumped, along with the FTSE, although the DAX has struggled. With a lack of major corporate announcements now, the dollar story will continue to drive indices. A quieter day today for the dollar is seeing markets consolidate.
- S&P 500 – Within touching distance of its all-time high again at 2120.
- DAX Xetra – The big uptrend since the beginning of January is intact and has so far held a correction over the past week. The outlook therefore remains strong. Even if there is a correction that sets in, ultimately it would simply be seen as a chance to buy.
- FTSE 100 – With 8 positive days out of the last 9 the FTSE 100 has broken above 7000. The next marker the bulls will be eying will be support around 6950 (the old breakout). Momentum looks positive for the move. It still seems as though it will be the weaker dollar which supports highly weighted energy/commodity plays that will be the driving force behind FTSE gains.
WATCH OUT FOR THIS WEEK
Tuesday 24th March
- US – CPI
- US – Flash Manufacturing PMI
- US – New Home Sales
Wednesday 25th March
- Eurozone – German Ifo Business Climate
- US – Durable Gods Orders
- US – Crude Oil Inventories
Thursday 26th March
- UK – Retail Sales
- US – Weekly Jobless Claims
- Japan – CPI
Friday 27th March
- US – GDP (final)
- US – University of Michigan Consumer Sentiment (revised)
Monday 30th March
- Eurozone – German CPI (Flash)
- US – Personal Consumption Expenditure
- US – Pending Home Sales
Tuesday 31st March
- UK – GDP (final reading)
- Eurozone – CPI (Flash)
- Canada – GDP
- 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