The US dollar is coming under renewed pressure following on from dovish comments given by Fed chair Jerome Powell on Friday.
In recent weeks we have seen increasingly volatile reactions on financial markets. Fear over a global cyclical downturn and the deflationary effect of a bear market on the commodities complex have hit sentiment. This came amid worries that perhaps the Federal Reserve was engaging in a policy mistake with remaining too tight in its latest rate hike of December. However, Friday’s Nonfarm Payrolls report has gone some way towards helping sooth risk fears, whilst Fed chair Jerome Powell then suggested that the Fed would be patient in its approach to rate hikes in 2019. Although this has had a mixed impact on the dollar, at least for now, risk appetite has been significantly boosted by this.
The payrolls report was dollar positive, but this only lasted for less than a couple of hours, with Powell’s comments which suggested that the Fed was monitoring events closely and was not strict on its current path.
Dollar back down again - Equities have seen the biggest jump, with strong recovery gains on Wall Street and subsequently Asia. Suddenly the glass looks half full again.
Today we also have the trade delegations of US and China meeting and this will lay the groundwork for potential agreement. Watch out for any newsflow to impact on risk appetite, Treasury yields and the dollar.
Wall Street closed sharply higher with the S&P 500 +3.4% at 2532, whilst futures are another +0.3% higher today. In Asia, there was also a very strong day with the Nikkei +2.4% and the Shanghai Composite +0.8%. European markets look a bit more cautious today, with the FTSE futures +0.1% and DAX futures +0.6%.
In forex, there is a dollar negative theme that has come from the dovish comments from Jerome Powell on Friday, with the yen being a key outperformer, whilst the Aussie and Kiwi are also positive.
In commodities, the dollar negative move is also helping gold and silver around half a percent higher, whilst oil has also continued to push forward in a recovery.
There is a US emphasis to the economic calendar today with the ISM Non-Manufacturing at 15:00 GMT being the key focus. Consensus expects a slight drop back to 59.7 (from 60.7 in November) but given the record drop I the manufacturing data it will be interesting to see if services can hold up better. US Factory Orders for November are at 15:00 GMT and are expected to grow by +0.7% on the month (after the surprise drop of -2.1% in October).
Chart of the Day – FTSE 100
Equities in Europe have held up amidst a risk sell-o:ff early in 2019 and with the positive news surrounding US and China in the trade negotiations, along with a risk positive payrolls report, there was a decisive move higher on Friday. The next move is to see if this recovery can be sustained. The FTSE 100 has recovered into a key area of overhead supply and is now sitting at a crossroads. The old October/November lows between 6850/6900 provided an area of overhead supply to the early December rally and this resistance is now being tested once more this week. This comes with momentum indicators decisively picking up for the first time in at least two months, with the Stochastics at seven week highs and a MACD bull cross. If the RSI can pull decisively above 51 to 12 week highs and really pull the momentum improvement for a test of the resistance. Another technical indicator to watch in the coming days is the falling 55 day moving average (currently 6930) which has capped all the recoveries since August. The hourly chart shows a near term breakout above 6752 is now supportive, with 6688 an initial higher low.
A volatile session on Friday saw the dollar swinging first gains on the strong payrolls report which were then cancelled out by Powell’s patience. A very neutral candle was the result, but the market seems to be pushing on with the dollar slip again today, with EUR/USD higher again in early moves. This has pulled the market back above the mid-point of the consolidation range $1.1300/$1.1500 and seen momentum indicators pick up again. The hourly chart shows a test of the near term pivot resistance around $1.1420 but essentially the outlook is still very neutral. In recent weeks, rallies have tended to fade in the resistance $1.1460/$1.1500 and until there is a close clear of this barrier there is little real direction on the pair.
Cable bulls have responded remarkably since the flash crash on Thursday. Bouncing from $1.2435 there has been a decisive positive candle on Friday which has now taken the market back within touching distance of the resistance at $1.2815 again. Momentum indicators are ticking positively again, with the Stochastics and MACD lines rising and there is a realistic prospect of an upside break again. The politics of Brexit will kick in again as the week progresses and this could limit the upside traction. Furthermore, the resistance is considerable between $1.2815/$1.2920, so upside may become limited too. Initial support around a pivot band at $1.2700 down to $1.2660.
The volatility of the flash crash is settling down now, as the market is seemingly gravitating around the old 108.10 breakdown. A positive candle eventually formed on a choppy Friday but the market has dropped back again this Monday morning, to leave resistance initially at 108.75. There is considerable overhead supply now between 108.10/109.75 and the rallies are likely to struggle here. The hourly chart does show that in the past could of sessions there is now a series of higher lows that are forming and this will provide the basis of support, initially at 107.40 and then 106.75. Above 108.75 is now needed to kick start the recovery again.
Gold
The bullish outlook has been questioned by Friday bearish outside day (interestingly not a bearish engulfing candle), but there is still an expectation that this will be another chance to buy. The momentum indicators remain strongly configured, and as long as the RSI holds above 60 this should continue to do so near term. It was interesting to see that the reaction low at $1276 on Friday was the old upper limit of the uptrend channel and this will be a near term gauge now. There is little that has changed on the fundamental perspective that should mean that corrections on gold remain a chance to buy, and the technicals also back this up. The breakout above $1266 is a basis of support. Friday’s low at $1276 is now a key gauge, whilst an early rebound today suggests that buyers are still willing to see intraday weakness as another opportunity.
WTI Oil
WTI has been hinting at a potential recovery for the past couple of sessions, with a run of positive candles building. A big move threatened on Friday but the bulls were hauled back into the close. However, there seems to be something building now and the buyers are creeping back in again on Monday morning. The market is at two week highs and is now around 16% off the $42.05 low. Momentum improvement is really beginning to take hold now with the RSI rising towards 50 at 11 week highs. This comes with the acceleration in the MACD and Stochastics improvement. The market is now testing the key resistance of overhead supply between $49.40/$50.50 and this is a key crossroads for the recovery. The near term breakout above $47/$48 is now a basis of initial support.
The past few weeks have been a rollercoaster for Wall Street traders. After the bulls had looked to give up their recovery on Thursday a complete turnaround on Friday has seem the Dow close decisively higher to a new two week high. Momentum confirms the move with the RSI and MACD lines reflecting the improvement. Thursday’s low at 22,638 is now a key higher low of note. The market is now into the resistance band 23,345/24,000 which is overhead supply of a string of key lows from 2018. These must be breached for the bulls to feel a sustainable improvement may be in process.
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