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Yields and dollar fall with Powell expected as next Fed chair


Market Overview

The dollar is feeling the strain as Treasury yields drop back ahead of some huge fundamental events today. The FOMC came and went, almost in the blink of an eye. With December massively priced in for the next rate hike, markets just shrugged shoulders with much bigger fish to fry. The Republicans pushed back the announcement of their tax reform bill by 24 hours to today, meaning that there are potentially tow massive announcements to come in the US session today (the other being Trump’s choice of the next Fed chair apparently at 1900GMT). Inflation expectations are crucial for the longer end of the yield curve, which means that the success of tax reform could be a game changer. There is a degree of caution on Treasuries which have just dropped back a touch early today, something that has hit the dollar. There is also wide expectation now that Jerome Powell will be Trump’s pick to replace Janet Yellen as Fed chair in February. Powell would represent continuity on monetary policy, and confirmation that a more hawkish John Taylor has been overlooked is an aspect here in the lower yields. However, with several other seats to fill on the FOMC board, perhaps going forward the interest will come in other members that Trump goes for. Meanwhile, in the UK there is a huge announcement brewing too, with the Bank of England likely to raise interest rates for the first time in ten years. However, it is unlikely to be the start of a concerted hiking cycle, and it will be interesting to see how sterling reacts if Governor Carney lays a cautious outlook and a potentially “dovish hike”.

Federal Reserve symbol and US flag

Wall Street closed higher again with the S&P 500 +0.2% at 2579 whilst Asian markets were mixed (Nikkei +0.5%) but European markets are cautious in opening moves. In forex the fall on Treasury yields means that the dollar is under pressure across the major pairs, with the rebound on the Kiwi gathering momentum. In commodities, the weaker dollar means that gold is around $4 higher however it is interesting to see silver marginally lower. Oil is consolidating today.

The prospect of tax reform and Trump’s announcement on the Fed chair are not the only announcements that traders will be looking out for. Initially in the European morning, the focus will be with the final reading of Eurozone Manufacturing PMI which is a day delayed is at 0900GMT. Expectation is that the flash reading of 58.6 will be confirmed, which would be slightly up from 58.1 last month. The big focus for UK traders will undoubtedly be on the Bank of England monetary policy at 1200GMT. The BoE is expected to hike rates for the first time in 10 years, by 25 basis points to 0.50%, with no change to asset purchases. Interest will also be on what sort of message the Bank sends out with this. The voting is expected to be 6-3 in favour of a hike, but  will Mark Carney signal caution with further hikes? Could it be a “dovish hike”? The Quarterly Inflation Report will also lay out the BoE projections for inflation and growth. The US weekly jobless claims are at 1230GMT and are expected to be 235,000, slightly higher than 233,000 last week and around the four week average which is currently at 240,000.

 

Chart of the Day – NZD/USD 

The Kiwi has been under terrible strain in recent times with a fall from $0.7200 to $0.6815 in less than two weeks in the wake of the Labour Party taking control of the government. However the $0.6815 support is a crucial long term floor on the Kiwi and it has seemed that the market wants to hang on to this support a little while longer. Positive candles have started to form as the market has consolidated in recent days, however a strong bull candle has now taken the market well clear of the support. A move above $0.6890 has improved the near term outlook, taking the market to a one week high. Momentum indicators are improving with the RSI ticking back above 30 (a near term positive signal), whilst the Stochastics are gently rising, however there is still much to do. On the hourly chart the near term improvement becomes more apparent with the pivot at $0.6880 forming support for another pull higher overnight, whilst the momentum indicators are more positively configured. A move back above yesterday’s high at $0.6930 would begin the formation of higher lows and higher highs. This is however a near term improvement, with a pivot resistance at $0.7005 and is certainly still counter-trend. The daily chart does though show a six week downtrend coming in around $0.7050 now which is an old key pivot.

 

EUR/USD

The euro continues to test the overhead supply of the three month top neckline and moving into what could be the crucial announcements of the week (tax reform and the Fed chair) there is a sense that this remains a ceiling. Since breaking below $1.1660 last week, EUR/USD has spent each of the subsequent sessions testing and failing at the old support of the neckline which has now become a basis of resistance. This comes with negatively configured medium term momentum and a sense now that rallies are a chance to sell. The early rebound overnight is again at the neckline whilst on the hourly chart, technical indicators are back around levels where the sellers tend to resume control. These things are not exact though and it is possible that the market could rally through $1.1660 but there is a near term sell zone between $1.1660/$1.1730 (the latter being the late October lows) that will be seen as an opportunity. Support is initially at $1.1605 and $1.1575 but expect downside to come in due course.

 

GBP/USD

The strong run higher of earlier this week has seen the market pulling up short of the range resistance once more. Yesterday’s initial gains found resistance at $1.3320 just below the $1.3335 mid-October high. All is not lost though as the market has ticked higher again in the Asian session today to keep the pressure on. This comes with the momentum indicators beginning to turn more positive, the Stochastics rising being the most prominent. However this has been a range play for a month now between $1.3025/$1.3335 and there are three potentially massive newsflow/fundamental events today that will likely see volatility spike higher. The Bank of England is set to increase interest rates (cue volatility on sterling), whilst Donald Trump is set to announce the choice of the Fed chair and the Republicans announce tax reform (both pulling the dollar around). Technically with Cable trading above all the moving averages along with a mild positive bias forming on near term momentum, the risk is for a test of $1.3335. However there is also the risk of a “dovish hike” from the Bank of England which could easily pull Cable sharply lower. This leaves positioning very difficult today, however once through these events the outlook will be much clearer for Cable, that is at least until the next Brexit related announcement (but let’s not worry about that for now). Initial support is $1.3230.

 

USD/JPY

With some outlook defining events to be announced today we see the dollar bulls just holding back a touch early today. This comes with Dollar/Yen pulling back from a further test of the 114.50 key July high again. A pause for breath? Probably so as the trend of higher lows and positive configuration on momentum all point towards Dollar/Yen being bought into weakness for continued pressure on 114.50 in due course. The low this week at 112.95 is a could basis of support now and with the market ending yesterday’s session with the highest closing price since May, the bulls are certainly ready. Look to use the early weakness to position for further gains today. The hourly chart shows initial support 113.50/113.70 but the bulls are in control whilst the market holds above 112.95. Above 114.50 opens 115.50/115.60.

 

Gold

Gold has moved into a difficult stage of analysis. The selling pressure of the past couple of weeks has dissipated and the market has held on to support at $1263.30 and looked to build again with some positive candlesticks. However there has not really been any breach of significant resistance that the bulls can consider as a key move in a recovery. $1282/$1284 is a basis of initial resistance which remains intact and above that the lower high at $1291. The market is looking at $1282/$1284 but as yet cannot make the break. This is all coming as the RSI is unwinding back to 50 and the MACD lines remain negatively configured under neutral. There is still significant uncertainty over whether this is a pause in the selling pressure before a test of $1250/$1260, or it is the beginning of another rebound back towards the long term pivot band $1300/$1310. Perhaps we will know more after the next couple of days of fundamental events.

 

WTI Oil

It is interesting to see that oil reversed to form a negative candle yesterday, having failed at the key 2017 resistance of $55.25. This came with the EIA oil inventories which showed crude stocks in line with expectation and mixed for distillates and gasoline. Perhaps the market was priced for a bigger drawdown? This negative candle at the key resistance opens the prospect of a bout of profit-taking. It is interesting to see the RSI again bumping up against 70 (a level where the July and September rallies failed), whilst the Stochastics have also crossed lower (not yet with a confirmed signal). The action at the support of $53.75 will now be important as a failure could now open a deeper correction within the uptrend channel again back towards $52.30/$52.85. On a medium term basis I remain a buyer into weakness.

 

Dow Jones Industrial Average

Positive moves on Wall Street have seen the Dow breakout again on an intraday basis. However, the move above 23,485 came very early in yesterday’s session only for the market to correct back again from 23,518. Chasing the market higher still seems to be the strategy, however, the momentum indicators continue to show signs of waning. Having had the Stochastics start to drop away (not yet giving a confirmed sell signal), the MACD lines are now starting to fall back too and are close to a bear cross. It is important to note that the market remains in a seven week uptrend which today comes in at 23,281 however the bull run is showing signs of fatigue. A strategy of cautious optimism needs to be employed. Support is at 23,328 which protects the key near term support at 23,251 now.

 

 

 

 

 

 


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