Dollar Hit Again By Weak U.S. Economic Data

Market Overview

For the third time in less than a week the dollar has been hit by weak US economic data and this time seems to have been the decisive blow which will finally put any chance of a Fed rate hike in September firmly to bed. The US service sector survey, the ISM Non-manufacturing PMI, fell to 51.4 which was the lowest reading since February 2010 and falling from 55.5 last month means that this was the biggest month on month decline since November 2008. The expectations for a Fed rate hike have subsequently dropped sharply. September Fed Funds futures from CME Group have dropped from 27% (prior to the ISM data) to 15% and even December is questionable with a drop from 58% to 46% on the back of the weak ISM Non-Manufacturing data. Markets have moved significantly on the back of this. Treasury yields (especially at the interest rate sensitive sorter end) fell sharply, whilst the dollar has been hit across the major pairs. Commodities such as gold, silver and oil were also boosted, whilst equity markets were happy to rally again on the expectation of the Fed being looser for longer.

Wall Street closed marginally higher with the S&P 500 up 0.3%, however Asian markets were less positive with a mixed outlook as the Nikkei fell -0.4% on a stronger yen. European markets are taking the Wall Street approach and are mildly higher in opening moves. In forex markets there have been mixed moves overnight with sterling actually unwinding some of the recent strength and the Aussie also pausing after its GDP growth numbers slightly missed expectations, however the yen remains strong. Commodities are yet to make a real move with gold, silver and oil all trading within 0.2% of flat.

The impact of Brexit is back in focus today with UK Industrial Production for July at 0930BST which is expected to improve mildly to +1.9% for the year. There is also the Bank of England’s inflation report hearing in front of the Treasury Select Committee which is likely to give Mark Carney a grilling over why the MPC acted so quickly in light of the recent positive UK economic data. The Bank of Canada monetary policy is announced at 1500BST and is expected to hold at +0.50% on rates but with a dovish tone. The US JOLTS jobs openings are at 1500BST with an expected slight dip to 5.58m (from 5.62m). The Fed Beige Book is also at 1900BST.

Chart of the Day – FTSE 100

The bulls are back under pressure once more as the negative correlation to the performance of sterling is having a detrimental impact on the index. The strong bull candle on Friday after the Non-farm Payrolls report seemed to rule out a Fed rate hike (loose monetary policy is seen as positive for equities), however as sterling has begun to push strongly higher the FTSE 100 is beginning to underperform (due to the significant foreign revenues weighting being impacted by sterling strength). This was a significant factor yesterday as the DAX and CAC held up reasonably well whilst the FTSE fell away quite sharply. The FTSE 100 is in a ranging phase now and could be on course to retest the support at 6723. The subsequent failure of Friday’s rally means that another lower high below the August high at 6955 has now been posted at 6928. Interestingly, the momentum indicators are pointing towards FTSE becoming range bound too, with the RSI rolling over at 60 and the MACD lines still corrective. Early moves today are mildly higher and the hourly chart shows that there is now a band of resistance now having built up between 6855/6870, whilst with the hourly indicators increasingly corrective the rallies will now be seen as a chance to sell. It could still be determined by the direction of sterling, but the momentum is now against FTSE 100 near term.

FTSE Daily Chart

EUR/USD

The ISM Non-manufacturing disappointment has temporarily given the chart some life again, driving a strong bullish candle that has pushed above the near term resistance band at $1.1233/$1.1250. However, coming ahead of the ECB meeting tomorrow this may limit any realistic follow through today. The technical indicators have picked up through yesterday’s bull run with the Stochastics especially notable, whilst the RSI is back above 50 and the MACD lines looking to bottom. Theoretically you would be looking to buy into dips now following the bullish move which has turned a neutral outlook more positive (trading above all the moving averages), however I am mindful of the ECB meeting tomorrow which could mean a slight corrective drift today. The hourly chart shows a minor consolidation has formed overnight between $1.1230/$1.1265 with the hourly momentum slightly stretched. There is support around the $1.1190/$1.1210 area to help bolster, whilst a decisive move back above $1.1265 (yesterday’s high) re-opens the next resistance at $1.1340.

EUR/USD Daily Chart

GBP/USD

The bulls got a shot in the arm again yesterday afternoon from the ISM Non-manufacturing PMI disappointment and subsequently another strong candle was posted. I remain bullish near term but am still mindful that there remains a sizeable amount of overhead supply at $1.3480/$1.3535. I am still expecting this near term trend higher to begin to lose impetus in the coming days in an area that maintains what I see as a range play. However for the near term the rally is strong with yesterday’s upside break of the 23.6% Fibonacci retracement at $1.3320 which had been a barrier. The hourly chart shows higher highs and higher lows continuing with momentum indicators that suggest corrections are still being bought into. There is near term support $1.3350/$1.3375 which is also where a near term uptrend is supportive. There is little reason why $1.3480 will not be tested, but I still see an upside breakout as unlikely at this stage.

GBP/USD Hourly Chart

USD/JPY

My previous concerns over the rally losing impetus and rolling over seem to have come to fruition with yesterday’s strong bearish candle which lost over 140 pips on the day and was a second consecutive negative move. The technical indicators are also now in deterioration mode with a confirmed sell signal on the Stochastics, and the RSI dropping sharply below 50. The hourly chart shows the top pattern below 102.80 that gave a downside target of 150 pips has hit its target of 101.30 and now the negative configuration of the momentum indicators suggests that intraday rallies will be sold into and the next band of support is between 99.53 and 100.95. There is a minor band of resistance 101.75/102.40 which could now be seen as an area where a rally may struggle. The main resistance is now the neckline of the top at 102.80. With the yen strength back in play I am expecting further weakness in due course.

USD/JPY Daily Chart

Gold

The US economic data disappointments of the past few days have all helped to drive dollar weakness and a subsequent gold price rally, culminating in a $25 jump yesterday. This move shows how gold is moving strongly higher now and the recovery is in full swing. The Stochastics are accelerating higher whilst the MACD lines are looking to turn higher and the RSI is also up to 60 again (around a 5 week high). The hourly chart shows how once the resistance at $1330 had been taken out the bulls seemed to be free to push on. This means there is a strong band of support between $1325/$1330. The near term indicators are slightly stretched and may be contributing to the minor consolidation overnight but look to use any unwinding as a chance to now push forward. The gold price should now be free to test the overhead resistance at $1357 which restricted the bulls on several occasions in August. Above $1357 would open $1367 and $1375. There is a band of near term breakout support between $1341/$1343.

Gold Daily Chart

WTI Oil

Oil traders have spent the past couple of days weighing up the prospect of a production cooperation between Russia and Saudi Arabia. The market did not settle on Monday so effectively two days of trading were in one candle, meaning that the largely strong move on Monday was retraced by a somewhat sceptical market on Tuesday. This leaves the chart with a significantly volatile looking candle and one which questions who is in control. The outlook remains uncertain with this move and although there has been a rebound in the wake of the ISM Non-manufacturing disappointing which led to dollar weakness, this seems to have been all that held up the oil price from a bigger retracement. However, the bulls are supportive again early today and are looking to test initial resistance at $45.60. WTI bouncing from $43.85 sees this as the key support now that needs to hold to prevent another look at $43.00. The daily momentum indicators are still in corrective mode and the bulls need to work hard to regain the impetus again. The main resistance is now the pivot band between $46.40/$46.55.

WTI Oil Daily Chart

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