Market Overview
Can the testimony of Jerome Powell sustainably turn around the medium term prospects of the dollar?
Powell’s upbeat assessment of the US economy has driven a dollar rebound again. Whilst essentially he did not add too much to the wildly perceived view of three hikes are likely this year, with four possible, there was a move higher on yields on the back of his comments on both inflation and wages. Powell has a belief that inflation is now picking up towards the Fed’s 2% target, whilst wages are also now growing. He also suggested that the March FOMC projections will begin to take account of the recent fiscal expansion measures.
Treasury yields spiked higher whilst the dollar gained as a result. The question is whether the dollar can maintain traction from this move. The Dollar Index resistance is around 90.55 and a close above here would be a key near term breakout, but longer term downtrends come in around 92 currently. So this would remain a near term rally within a longer term downtrend. Despite this though, supports such as $1.2090 on EUR/USD, $1.3765 on GBP/USD, $1300 on gold along with resistance at 108.30 on USD/JPY will all be watched keenly if the dollar does start to gain traction. Equities sold off strongly on the fear of increase rates driven by increased inflation.
Can the dollar maintain a recovery amidst inflation fears?
The Atlanta Fed GDPNow Q1 GDP being cut to +2.6% from 3.2% a couple of weeks ago, does not reflect an acceleration of growth, so the dollar is likely to continue to struggle. Add in a disappointing set of China PMIs overnight too and the safe havens may begin to benefit once more. China Manufacturing PMI dropped to 50.3 which was an 18 month low (51.4 exp, 51.3 last). China Services PMI also fell to 54.4 (55.3 last).
Wall Street fell strongly with the Dow around 300 ticks lower and the S&P 500 down -1.3% at 2744. Asian markets were also under pressure following the Powell comments and the weaker China PMI data, with the Nikkei -1.4%. European markets are also broadly lower in early moves.
In forex markets, the dollar strength from yesterday seems to have stabilised to an extent, with little real move across the major pairs today.
In commodities, gold has found support, but oil is mildly lower after losing ground yesterday on the back of the dollar strength.
Traders will be keeping a close eye on Eurozone flash inflation at 10:00 GMT. After German inflation missed to the downside yesterday, there will be the added risk of a downside surprise from the expected flash headline CPI drop to +1.2% (from +1.3% last month) and the flash core CPI expectation of +1.0% (+1.0% last month).
The other key data of the day is the prelim (second) reading of US GDP growth for Q4 2017 which is expected to be revised slightly lower to an annualised +2.5% (from +2.6% from the Advance reading). Pending Home Sales are at 15:00 GMT and are expected to grow by +0.3% for the month.
The EIA Oil Inventories are at 15:30 GMT and are expected to show a crude oil inventory build of+2.8m barrels (last week a drawdown of -1.6m barrels), with distillates expected to drawdown by -1.0m barrels (-2.4m last week) and gasoline stocks also in drawdown by -1.0m (+0.3m last week).
Chart of the Day – NZD/USD
The Kiwi has been struggling, starting to underperform other major currencies in recent days and now has made a significant breakdown against the dollar. Jerome Powell’s testimony drove dollar gains across the board but the Kiwi was especially impacted and has now broken a key uptrend that dates back to early December. This now puts the pressure on the Kiwi which is now at risk of a deeper correction. An eight day downtrend has dragged the market lower accentuated by a strong bear candle from yesterday, and a close below $0.7240 suggests that the key February low at $0.7175 is now at risk. The daily momentum indicators have taken a key turn lower in the near term configuration with the MACD, Stochastics and RSI all in reverse now. The reaction of the bulls will be all important today. Early gains come into the European session but intraday rallies have tended to be seen as a chance to sell now. There is a mini downtrend around $0.7320 now, whilst the hourly chart shows resistance $0.7270/$0.7295.
EUR/USD
The dollar strengthened off the back of Powell’s comments yesterday and this has pulled EUR/USD back towards a key support. The market has found key support previously at $1.2205 in February and once more this level is being tested. Yesterday’s strong negative candle now means that the market is at risk of topping out near term. However, for now this still looks to be a corrective move within the three and a half month uptrend. The near term indicators suggest negative near term momentum and a breach of $1.2205 could easily be seen, but unless there is a decisive break back below the major breakout support at $1.2090 (which would also break this three and a half month uptrend), then this remains a corrective move that will ultimately be seen as a chance to buy. The hourly chart shows near term resistance at $1.2260/$1.2275 will be watched today for a potential recovery, but with near term momentum negative now, rallies may struggle. Below $1.2205 there is initial support at $1.2175.
GBP/USD
As the dollar has looked to strengthen on the back of Jerome Powell’s comments the market is testing a six week uptrend. However, a recent support at $1.3855 held to the pip yesterday and whilst the near term pressure remains negative, the fact that support is still holding for the Cable bulls should be seen as encouraging. Although the daily momentum indicators have ticked lower they are not a significant drag on the market, whilst the hourly chart is showing just a slight negative bias but within broadly ranging conditions. The $1.3855 support is preventing a retreat towards $1.3765. The hourly chart shows a near term pivot resistance now $1.3920/$1.3940 which the bulls needs to breach today but $1.4000 remains the key barrier to overcome near term.
USD/JPY
Dollar/Yen remains a market configured to be a sell into strength. There is a resistance band of overhead supply 107.30/108.30 and it is interesting that the market closed yesterday’s rally session at 107.30 before falling away again early today. There is resistance of the seven week downtrend today coming in at 107.70 which is almost bang on yesterday’s rally high and is now below the key near term resistance at 107.90. Momentum indicators are still configured to use this rally as a chance to sell, with the RSI and Stochastics both again struggling around 40. The hourly chart shows the gains from Jerome Powell’s comments from yesterday have now been retraced and although the market is ranging in configuration, there is still a lack of follow through from the bulls which is a concern. There is near term minor support at 106.80 today with a breach re-opening 106.35 initially.
Gold
The prospects of a large top pattern have increased following the strong bear candle from yesterday that breached the initial support around $1320. This brings the longer term key pivot support at $1300/$1310 back into play and the key low from earlier in February at $1306.80 will now be watched keenly. The momentum indicators are more corrective near term now and suggest the support could come under pressure. However there is still a positive medium term configuration which the bulls will be considering and if this support at $1306 continues to hold firm, the buyers will begin to be tempted again. The coming sessions will therefore be key for gold. Initially today, the market has been supported, with yesterday’s low at $1313.30 still intact. The hourly chart shows the old lows of $1320.60/$1325.50 now become overhead supply and needs to be breached for the bulls to begin to regain some confidence again.
WTI Oil
WTI has put together a strong recovery since hitting a recent low at $58.10 and in this run has formed an uptrend channel, whilst momentum indicators have become increasingly positive. This comes with the MACD lines crossing higher, Stochastics tracking strongly positive and the RSI above 50. Yesterday’s corrective move is a blot on the copy book, but as yet has done limited damage to the recovery, for now. The bulls drove a key breakout above a pivot at $62.85, which is now a basis of support, but this support is under strain today. The mini uptrend channel comes in as supportive around $62.50, so this means that the bulls will have to fight hard to continue with the recovery at its current pace. A move below $62.35 would begin to gain downside traction. However if the channel were to be breached it may still simply just be part of a consolidation and whilst the support at $60.75 remains intact the recovery will still be on course. There is now resistance at $64.25.
The bulls took a step backwards after three very strong trading days had seen the market break sharply higher. A strong negative session has unwound some built up overbought near term momentum, but will only be seen as a positive if the market begins to form support again soon. Subsequently, the breakout support at 25,432 will be seen as a key near term gauge. Daily momentum indicators remain on their improving paths. However the hourly chart shows near term stretched positions on the RSI and Stochastics are now unwinding. The question is now just one of how far the market drops back before the bulls find the buying opportunity too great to pass up. There is still an upside gap open at 25,314 and could now be set to be at least filled, however the 61.8% Fibonacci retracement of the sell off at 25,372 is supportive. Yesterday’s high at 25,800 is now a basis of resistance before the 76.4% Fib level at 25,848.
"DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.
All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.