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Will dollar weakness continue after US inflation?

Last updated: May 3rd, 2017 at 09:58 pm

Market Overview

The dollar has remained under pressure in the early part of the week as the legacy of Friday’s disappointing US Retail Sales have continued to weigh it down. Will the next batch of US data (including CPI inflation) continue this trend of dollar weakness? Once more this morning, in front of the data, the dollar is under pressure and it will be interesting to see how the trade weighted dollar index reacts to the pivot band at 95.25 which has consistently been a key turning point throughout 2016. Today we get the first major economic data point for post-Brexit UK, with a look at the impact on inflation, with the CPI for July. Although sterling has weakened by 14%, inflation is not (according to consensus) expected to show much of an impact in the first full month since Brexit. However the US data will be the main driver, with housing data, inflation and industrial production all released this afternoon. Markets remain fixated by the expectations of, and impact on, Fed monetary policy and following this stream of data there will be more meat to the bones.


Wall Street may have managed to close once more at all-time highs yesterday (S&P 500 up +0.3%), however this positivity was lost on Asian markets overnight with the Nikkei -1.6%. European indices are also struggling and are mildly weaker this morning after an incredible run higher and the prospect of some profit taking, whilst a minor drop back on oil is also adding to the corrective pressure. Forex markets once more show the US dollar under pressure across the board and underperforming all of the major currencies, with the strength of the yen and the Kiwi once more the standout. Precious metals are also taking advantage of today’s dollar weakness with gold trading around $10 higher.

The data starts off with UK CPI at 0930BST which is expected to stay at +0.5% for the headline year on year and perhaps somewhat surprisingly drop to +1.3% on the core number (from +1.4%). German ZEW Economic Sentiment is at 1000BST and is expected to improve back to positive at +1.8 (from -6.8). US CPI is at 1330BST and is expected to drop to +0.9% on the headline (down from +1.0%) and stay at +2.3% for the core. Building permits are at 1330BST (1.16m exp) and Housing Starts are also at 1330BST (1.18m exp). The US Industrial Production is also at 1415BST and is expected to show +0.3% MoM growth and capacity utilization is expected to improve marginally to 75.6 (from 75.4).


Chart of the Day – EUR/GBP

With the weakness of sterling a relative outperformance of the euro, the Euro/Sterling cross has now broken out above its post Brexit high of £0.8625 to take the price to its highest level in three years. Yesterday’s strong bull candle adds to the confidence in the breakout and the move now opens a test of the August 2013 high of £0.8765 and the key February 2013 high of £0.8815. Technically, when you get trending moves like this the RSI above 70 is a sign of strength of the trend (rather than an overstretched position) and this would suggest that with the July run high going to 77 and spending around two weeks above 70, there is  still further upside potential in the move. Other momentum indicators remain bullishly configured too with the old breakout of £0.8625 now becoming a basis of support. The medium to longer term perspective would suggest there is now a great “buy zone” on a dip back to the range between £0.8470/£0.8625. The hourly chart reflects excellent momentum configuration for the bulls and any intraday correction being used as a chance to buy, with the hourly RSI giving a buy signal between 45/50 being perfect, whilst the 55 hour moving average is a basis of support at £0.8645.

EURGBP 16082016


With the dollar remaining under pressure in the wake of the disappointing US Retail Sales numbers, the chart of EUR/USD has retained its mild bullish bias. Despite a very quiet 50 pip daily range, a bullish candle formation is helping to increase the impetus which is being carried over into today’s trading too. The momentum indicators are also turning increasingly positive now with the Stochastics swinging higher once more and the RSI also towards 60. The euro has subsequently gained ground today and pushed above the resistance at $1.1233, but now there needs to be a closing breakout to confirm the move. The move above $1.1233 resistance is the highest the pair has been since the market began to settle post Brexit. Watch for the RSI confirming with a move above 60. The hourly chart also reflects this bullish bias and holding support above the near term pivot at $1.1150 is positive now, with the bulls looking to use corrections as a chance to buy. Above $1.1233 there is little real resistance until the pre-Brexit high of $1.1432 so the chances for a near term extended run would be good. The hourly chart shows support between $1.1200/$1.1233 now.

EURUSD 16082016


The steady decline on sterling continues to drag the price back towards a test of the key 31 year low at $1.2796. The sell-off may not be precipitous but the bears are certainly in control and intraday rallies continue to be seen as a chance to sell. The momentum indicators remain bearishly configured and there is also downside potential for the move lower. This is all confirmed by the negative configuration on the momentum indicators of the hourly chart. The overhead resistance starts around $1.2950 and up towards $1.3000. This could though be a more volatile trading day than some of the recent days. There is a raft of economic data from both UK and US, with the highlights being CPI inflation for both UK and US which could certainly have an impact on both sterling and the dollar. The main support is clearly the key low at $1.2796, whilst resistance is $1.3035 and the pivot at $1.3100.

GBPUSD 16082016


After a period of consolidation the dollar is back under pressure once more. The near term trading range that had formed between 100.65 and 102.65 has been broken this morning as the bears look to gain traction again. The daily momentum indicators are all still very negatively configured but also show that there is further downside potential. With the RSI only at 36 (with the low 20s seen on several times during sell-offs this year). A test of the 100.00 level seems to be imminent (Reuters charts have the July low at 100.02) and a breach of that would then open the spike low of 99.08 from the 24th June. Technically the breakdown of the consolidation below 100.65 gives an implied 200 pip downside target now too. The hourly chart shows the breakdown and with old support becoming new resistance there is an overhead supply now between 100.65/100.95. Yesterday’s high at 101.45 is further resistance with any intraday rallies being seen as a chance to sell.

USDJPY 16082016


For several days now the bulls have been struggling to find traction in a run higher, but with the dollar coming under pressure again, could the gains this morning be held on to? However the candles of the past week have all shown early promise only to be sold off later in the day, so caution should be in mind. The daily chart shows a fairly mixed outlook still with the momentum indicators pointing in different directions  (RSI is positive, whilst the Stochastics look a touch more corrective and the MACD lines are giving little real sign of near term bull control). This all suggests that the near term outlook is still uncertain, even though the medium to longer term bulls are still firmly in control and I still favour further upside in due course. With the gains this morning there needs to be a push above $1357.20 (last week’s high) to suggest any real traction is being found. There is further resistance at $1367 and $1375. On the positive side for the near term outlook, the importance of the support around $1330 is growing by the day. The hourly chart reflects the near term consolidation, with momentum indicators suggesting this is still a range play.

Gold 16082016


There seems to be no let up as the rally on oil of the past couple of weeks continues. Having left the key low in at $41.10 last Thursday the bulls have backed the run higher. Technically the move is increasingly strong with the Stochastics accelerating higher, the MACD lines recently rising off a crossover buy signal and the RSI is back above 50. There is an interesting clutch of technical indicatros ahead now though. The price of Brent Crude may have already broken its downtrend dating back to the June high, but WTI still is to make the test (with the downtrend today coming in at $46.20). This test will also coincide soon with the 23.6% Fibonacci retracement of $26.05/$51.67 at $45.60, whilst the resistance between $46.10/$46.35 is also overhead. The falling 21 day moving average (currently $46.00) is also overhead and has previous acted as a key indicator to watch. A move on the RSI back above 60 would also be seen as key for medium term momentum strength. The hourly chart shows another higher low has been posted at $44.40 and is the initial support, however the key support for the bulls to hang on to is the breakout above $43.40.

WTI 16082016

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.