Market Overview
After several days of dollar weakness there was a change in sentiment yesterday. The hawkish comments from FOMC members Lockhart and Dudley have driven a dollar recovery, and this is impacting across forex majors and commodities.
Lockhart noted that there could easily be room for a rate hike in 2016, whilst Dudley suggested that September could even be on the table. Suddenly the selling pressure on the dollar dissipated and there has been a turnaround. It will be interesting now to see if this is a short squeeze or whether it is something more sustainable.
There have been some key moves in forex, with the euro breaking out above $1.1233 and dollar/yen breaking below 100, however there is now a threat of a retracement. Gold and silver have been struggling to find traction in spite of the dollar weakness of recent days, so they could be at risk of a drop if the dollar can rally.
The minutes from the July FOMC meeting are released tonight and it will be interesting to see how hawkish the committee is. References to Brexit and international factors will be especially interesting. There was a mildly hawkish lean in the wording of the July statement.
The profit-takers on equities are also circling, with declines on markets yesterday as Wall Street closed lower (S&P 500 -0.6%). Asian markets were though mixed to higher overnight (Nikkei +0.9%) with European markets trading slightly higher at the open today.
Forex markets are showing dollar strength across the board today, with the yen the main underperformer. Commodities are slightly lower, with gold and silver trading mildly weaker and the oil price also off.
After yesterday’s mild pick up in UK inflation, focus now turns to employment and wages in the UK in the first month since Brexit.
The headline UK unemployment rate for the last three months is at 0930BST and is expected to stay at 4.9%, and an increase in the claimant count of 9,500. However, the real focus will be on the Average Weekly Earnings growth, which is expected to increase slightly to +2.4% (from +2.3%).
The EIA oil inventories are at 1530BST, with crude stocks expected to rise by 1.0m barrels, with volatility on the oil price always a result. The FOMC meeting minutes are released at 1900BST.
Chart of the Day – DAX Xetra
The run higher of the past two weeks from the key low at 10,092 has had its first real corrective sign. This is coming as yesterday’s candle filled a downside opening gap to close lower on the day. Has this now left, resistance and a high at 10,802. Momentum indicators are looking a bit at the mercy of the profit takers too. RSI has turned back from 70 (a basic profit taking signal) whilst the Stochastics have now crossed lower (not confirmed as a sell signal yet).
The support to watch is at 10,635 which was a key reaction low from last week in the rally. The hourly chart shows this is so far more of a minor consolidation move, but the support at 10,635 is near-term key as it has been tested twice now in 5 days, and a breach would complete a small top pattern that would imply around 170 ticks of correction. This would bring the DAX back towards its key breakout at 10,474. The 10,802 high sits as resistance and the 38.2% Fibonacci retracement of the 8355/12390 rally is at 10,850, so this is a natural place for the profit takers to consider their move.
EUR/USD
The dollar has been coming under some significant corrective pressure in the past few days and the move has taken the EUR/USD pair above the key near-term resistance at $1.1233 on a closing upside break. Can the move be sustained?
Technically the outlook is increasingly positive, with the RSI pushing above 60 to a new three-month high in a confirmation move, whilst the MACD and Stochastics are also positive. It will be interesting to see how the bulls react today.
There have been some hawkish comments from FOMC members which have started to see the dollar regain some lost ground in the past 12 hours, something that has already pulled EUR/USD lower by over 60 pips from yesterday’s high at $1.1322.
The hourly chart shows the breakout at $1.1233 is now supportive with a band of support above $1.1200. As yet the move merely looks to be unwinding a bit of the near term overbought momentum. A near-term 3-week uptrend comes in as support around $1.1150 which is also a near-term pivot level. A move below there would now change the outlook once more.
The bull run higher yesterday had the feel of a short covering rally to it. The selling pressure over the past couple of weeks that had posted a very consistent run of negative candles rallied sharply off $1.2863 amidst the dollar weakness and a pick up in UK inflation. This caused a sharp positive candle of over 170 pips to the upside.
However, the overhead barrier of the $1.3060 old breakdown has already started to be the basis of resistance again as the rally has started to stumble. The momentum indicators will now be interesting, with the Stochastics turning up, but still the RSI and MACD lines negatively configured. Do you trust a crossover buy signal on the Stochastics? I would be looking for confirmation across indicators as I am still looking to use rallies as a chance to sell for a retest of the 31-year low at $1.2796.
The hourly chart shows how $1.3060 has been capping the gains in the last 12 or so hours, whilst hourly momentum indicators are beginning to roll over. There is plenty of overhead supply between $1.3060/$1.3100. I do not see this as a sustainable move and I expect the bears to resume control. Above $1.3160 would change the near-term outlook.
USD/JPY
The selling pressure on dollar/yen took the pair back below the key 100.00 level yesterday. However, after hitting a low at 99.53, a big retracement has started. Driven by the hawkish comments from the FOMC’s Lockhart and Dudley, the dollar has bounced 150 pips. Will this move be anything more than another opportunity to sell? I am still a seller of dollar/yen into strength, and the momentum indicators are yet to show any significant improvement on the daily chart that would suggest a change of view.
The closing price of yesterday was below 100.65 and confirms the completed downside break from the 200 pip range. In terms of momentum, the RSI is still below 50, MACD lines have barely budged and Stochastics are still negatively configured.
The hourly chart however has shown a rally that is looking to push decisively back above the resistance band 100.65/100.95. However, the congestion of the old range means there is plenty of overhead supply still to prevent a meaningful rally. A failure below 101.65 (an old mid-range pivot) would see the bears resuming control for further downside. The hourly momentum indicators are unwinding the bear momentum still rather than driving a bullish recovery. I expect this rally to be short lived. A move back below 100.65 would resume the sell off.
Gold
Once more the bulls have failed to grasp control, and the trading day yesterday finished with something of a damp squib. I discussed in my videos yesterday the consistent failure of the bulls in the past few sessions (shown with the succession of long upper tails on the candles) and once more yesterday there was another failure. I have now drawn in a couple of converging trendlines which reflect the recent consolidation over the past few weeks.
The resistance is growing around $1358 (yesterday’s high was only just above the previous $1357.20 before the reverse). The momentum indicators are still very mixed with the RSI solid above 50, but the Stochastics are drifting lower. I am still positive of the medium/longer-term outlook and see corrections as a chance to buy.
Today’s early slide only adds to the uncertainty of the near-term outlook. The hourly chart shows the importance of support at $1330 and whilst the bulls remain above here the outlook will remain positive. The consolidation continues.
After several days of strong gains on oil, as WTI has been approaching a series of key technical indicators that could prove to be a key crossroads, the rally has started to show signs of slowing. The latest strong candle yesterday has pushed through the resistance of the two-month downtrend (similar to Brent crude) which is today at $46.10, along with the falling 21 day moving average (today at $45.98) and the price resistance at $46.10/$46.35.
However, this needs a decisive break above $46.93 to confirm the crossroads has been successfully negotiated. The RSI needs to push decisively above 60, which is where a rally in late June fell over. The hourly chart shows positive momentum is still in place. Initial support is at $45.35 and $44.40 with the key near-term breakout at $43.40 now a vital line in the sand for the bulls. A move above $46.95 would open resistance at $48.25 but realistically re-open the highs gain.
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