Market Overview
There have been some big moves on currency markets in the past 24 hours as politics have been driving direction on the dollar and sterling. The US dollar has come under pressure after President-elect Trump commented that the dollar strength had gone too far, driving a sharp move lower on the US trade weighted dollar index to a level close to 100 and lower than it was prior to when the Fed raised rates in December. Although Treasury yields did not match this decline, their continued track lower will be a contributor to this decline. The dollar may have unwound some lost ground early today but at the moment it looks to be a corrective move within a dollar trend lower. Sterling was a contributor to this dollar decline too, with a huge rally of 370 pips yesterday on Cable driven by the supposed clarity in a key speech on Brexit by Theresa May. Although May outlined a “hard Brexit” scenario of the UK leaving the EU single market and customs union, her reassurances on transitional agreements and a parliamentary vote have buoyed sentiment for sterling. The question is whether the bulls can now build on this platform for a sustained support and recovery. There is another speech today, from FOMC chair Janet Yellen on the goals of monetary policy in San Francisco which could be another driver of dollar moves later today. After Yellen opted not to focus on the US economy or monetary policy last week, there is likely to be more reaction today.
Wall Street closed marginally lower (S&P 500 -0.3% at 2268) however Asian markets have bounced with the Nikkei +0.4%, a move which is helping European markets mildly higher in early moves today. Forex majors who the dollar is positive across the majors but is merely unwinding some of yesterday’s sharp losses and will need to continue for this to be any more than a bear rally. Gold and silver have reacted lower with the dollar strength, whilst oil is mildly higher, still in consolidation mode.
After few days of quite a light economic calendar, the releases ramp up today, starting with the UK employment data. Headline UK unemployment is expected to stay at +4.8% with the claimant count expected to increase by 5,000 jobs. Traders will be interested to what happens to UK wages. UK average weekly earnings growth is expected to stay at +2.6% for the year on an ex-bonus basis which would mean a slight decline in real wages after the surprise increase in CPI yesterday. Final Eurozone inflation for December is at 1000GMT and is expected to be confirmed at +1.1% year on year for headline, whilst core CPI is expected to be +0.9%. US CPI is announced at 1330GMT and is expected to rise to +2.1% (from +1.7%) for the headline with the core CPI expected to increase to +2.2% (from +2.1%). US Industrial Production is at 1415GMT and is expected to improve by +0.6% for the month, with capacity utilization expected to improve to 75.4 (from 75.0). The National Association of Home Builders housing market index at 1500GMT and is expected to fall back to 6.0 (from 70.0). Finally on the data front, there is the Bank of Canada with its monetary policy decision at 1500GMT which is not expected to change with rates staying at +0.50%. Janet Yellen speaks on the “Goals of Monetary Policy” at 2000GMT.
Chart of the Day – Silver
Since the precious metals bottomed at the end of December gold has rallied just over 8% whilst silver has rallied almost 9%. However looking at the charts you would not think that silver was the outperformer. Whilst gold has made the decisive breakout above the old key floor turned resistance at $1200, silver is still yet to complete the break above its equivalent resistance. There is a pivot around $17.20 which is around old key June and September lows whilst also capping the upside in December. However with the strength of the bull candle yesterday the market is primed for a bull test. Also, looking at the momentum indicators the increasingly positive RSI which is pushing ever into stronger configuration at the highest level since August, whilst the MACD lines are also at a key junction back at neutral. A successful closing break above $17.20 would open a move towards the next resistance band between $18.35/$19.00. Hitting the resistance of $17.20 at its high yesterday the market has just dropped back slightly early today. However, the outlook remains positive. The hourly chart shows a strong band of near term support now at $16.75 to $16.0 to use as support for a near term corrective move with dips continuing to be bought into.
The pair continues to push higher in its recovery, having posted a very strong bull candle of over 100 pips of upside that has confirmed the break above the resistance at $1.0670. The near term outlook remains positive but for this to turn into a medium term positive outlook there now needs to be a push clear of the resistance at $1.0870 which was December’s key high. Momentum indicators continue to improve with the RSI closing yesterday at 61 and the Stochastics into strong near term bull territory. Corrections continue to be bought into and the early drop back today is likely to provide another chance to buy. The hourly chart shows an unwinding move and there is a band of breakout support between $1.0650/$1.0670 to work with today. Hourly momentum is positively configured and unwinding moves on the hourly RSI into the 35/45 are have been bought into recently. Support at $1.0577 now needs to hold to maintain the bull run.
With 370 pips added on the day sterling bounced back extremely strongly on the speech of Theresa May, with traders clearly taking the positives from the apparent clarity it has brought. As you can imagine the bull candle has had a significant impact on the technical outlook, turning a negative outlook around. Is this the start of a sustained rally? The candle formation in the next couple of days will tell us a lot more as the dust settles. The initial reaction today is that Cable is lower again with sterling (at least early in the European session) underperforming many of the other forex majors amidst a minor dollar recovery. It will not be unnoticed that sterling has not pushed to a new January high yet with the resistance at $1.2430 looming large still overhead. This will be a key near term resistance now. An old pivot at $1.2300/$1.2330 will be a key support also today as although the momentum has picked up a drop back will quickly render the improvement a bear market rally again. The hourly chart is clearly far more positively configured with the supports at $1.2300 and $1.2200 key levels. Yesterday’s high was $1.2415.
The consistent run of dollar weakness/yen strength has breached the support at 112.82 and although there has been a minor rebound early today there is little yet to suggest that this move will be sustained. The deterioration across the momentum indicators has taken the RSI below 40 which is a sign that the bears are in full control still, whilst the Stochastics are also strongly negative. A breach of 111.32 support would be a key signal of continued negative intent. The reaction to the rebound today could also be a telling sign as the market has recovered around 70 pips early today but the hourly chart shows big overhead supply around 113.70 and this is just another move to unwind the hourly RSI back to a level where the bears have continuously sold off again. Support came in at 112.55 overnight but this will be a key test of a near term “dead cat bounce”. Above 114.35 would improve the outlook but the bulls need above 115.45 to consider themselves in control. I remain a seller into strength.
Gold
The strong bull candle from yesterday pushed the market well clear of $1200 which is now a key area of support both for the price pivot and also trader psychology. Momentum remains strong and the reaction to the initial sip back today will be interesting. The move is currently no more than a blip in the trend higher (the trend is your friend) with corrections continually being bought into over the past few weeks. Although the daily RSI hit over 70 yesterday and has dropped back below, without a deterioration (confirmed crossover sell signal) on the more sensitive Stochastics this is nothing to be worried about yet for the bulls. The next upside resistance is at $1221 and $1233 before the key resistance band $1241/$1250. The hourly chart shows a strong trend flanked by the support of the rising 144 hour moving average which has supported throughout (currently at $1198). There is support initially around $1207/$1210 before $1200 is the pivot. The bulls remain in control until a breach of $1187.50.
WTI Oil
After several days of consolidation are the bulls ready to push for an upside breakout? The near term downtrend of the past couple of weeks has now been broken by yesterday’s bull candle, despite the late drop back in the price which formed a disappointing candle for the bulls. However, this comes as the market continues to hold above the medium term pivot that has formed above $52.00. There is still a resistance at $53.50 which remains intact and until this is cleared the shackles will remain on for the bulls and today’s candle will be important following the late decline into the close yesterday. Momentum indicators have tracked the sequence of lower highs in the past couple of weeks but this still looks to be corrective move to unwind bull momentum and help to renew upside potential. The hourly chart shows a minor bullish bias in momentum indicators but are not yet screaming out for the bull breakout. It is interesting to see yesterday’s breakout above the downtrend also using the downtrend as the basis of support for a higher low at $52.45. A close above $53.50 would open the resistance of $54.32 and then the key high at $55.25.
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