Market Overview
A remarkable intraday turnaround on dollar has impacted financial markets and now poses the question of whether the dollar is set up for another recovery and will it last? The dollar rebound has impacted across forex, commodities and equity markets alike. Reversal signals against the euro and yen have been posted, gold is lower and equity markets also lower. However the warning signal for the dollar bulls is that Treasury yields have barely budged, if anything they are consolidating their breakdown. Yesterday the US 10 year Treasury yield broke to a new 3 month low and as yet shows little sign of a recovery. Yesterday’s dollar rally was built on very little, with only really marginally better than expected Weekly Jobless Claims to point to as a reason. Sometimes there is no discernible reason for a rebound and it can sometimes be technically driven, however I do not believe that this dollar rally will be long lasting.
Wall Street closed lower with the S&P 500 -0.2%, paring three days of gains. Asian markets have also been weaker across the board with the Nikkei -0.4%, whilst European markets are also weaker. In forex markets there is a marginal degree of dollar strength still in play following on from yesterday’s rebound, however interestingly, the yen continues to perform well. Gold has started the day marginally weaker, as has silver. The mini correction that started to come through on oil yesterday has continued into today with further losses of just over half a percent currently.
It is a quiet day for economic announcements, with only really the University of Michigan Sentiment which is at 1500BST. The expectation is for a further slide to 94.1 back from the downwardly revised 94.7 last month.
Chart of the Day – EUR/GBP
Recently tightening Brexit opinion polls have been putting pressure on sterling and driving EUR/GBP back higher again. However the technical outlook will still not turn decisively against sterling until a close above the right hand shoulder high of the old top pattern at £0.7945. Ultimately, I see this recent rally on euro/sterling will prove to be another chance to sell (for sterling strength in the likelihood of a UK vote to remain). The technicals are rolling over again and suggest that the recent rally is running out of steam now. The RSI is failing below 60 having put consistent pressure on 30 (which suggests a bear market rally), whilst the Stochastics are crossing lower again in a similar fashion to the May sell signal. I spoke previously about the old long term key pivot at £0.7750 and this caught the reaction low on Tuesday, but I expect this will come under further pressure in the coming days. This week’s rally high at £0.7905 is resistance and could easily now look to form another lower high under £0.7945. However, the £0.7750 pivot is key to the outlook near to medium term now as it protects a deeper move lower back towards initially the old neckline at £0.7690 but also possibly the May lows again at £0.7560.
Is this a near term turnaround for the dollar? The completion of a bearish engulfing candle (bearish key one day reversal) has signaled a change in sentiment. We now must look for confirmation of this near term sell signal. A second consecutive bearish candle today would suggest that the bears are gathering momentum on EUR/USD once more, and the early weakness today means that this is a distinct possibility. The Stochastics have crossed lower and we now look for a confirmation of the sell signal. I still believe that this is likely to be merely a near term change and I am expecting the bulls to regain control in the days running up to the FOMC (next Wednesday), however, for now there looks to be a corrective move. The hourly chart shows support at $1.1320 has been broken by the correction and this has put pressure on $1.1290 overnight. There is further support at $1.1245 and $1.1215. The old near term support around $1.1320/30 becomes the initial resistance today with the key high now at $1.1415.
The volatility that we saw earlier in the week seems to be settling somewhat. Perhaps this calm has been because there have been no surprising opinion polls regarding the EU referendum, but do not expect this to last for long. The period of calm has resulted in a marginal turn lower and a drift back once more as the US dollar has started to rebound against major currencies. The initial support at $1.4433 could come under pressure now, with the uptrend support dating back to February lows coming in today around $1.4370. This would suggest that for the bulls there are some key levels in the next 100 pips to the downside with Monday’s low at $1.4350 and then the key May low at $1.4330. Daily momentum indicators have also drifted lower again but in truth there is still no decisive direction to be derived. The hourly chart has been posting a sequence of lower highs in the past couple of days, with $1.4525 and $1.4510 now resistance.
The weakness on the dollar has just subsided for the time being as an intraday reversal yesterday has formed a positive candle that could arguably be described as a bull hammer. Given the significantly bearish outlook to the chart, sometimes you will get retracement moves and this looks to be just that. It will be interesting to see the reaction today as the yen has been a strong performing currency of late and there is little change to any fundamentals of any note that would suggest that we are about to see a decisive dollar rally. There is very little sign on the momentum indicators of any impending rally either. That makes today’s candle important, as the recovery needs a bullish candle to back it up otherwise the bulls will lose momentum. The intraday chart shows a break in the recent downtrend, but the resistance is still in the band 107.50/108.20. So far the hourly momentum is not showing any significant shift towards a positive outlook. The support is now in place at 106.25.
Gold
The rally reached $1271.30 yesterday but there are now signs that there could be a reversal on the way, at least for the near term. The run higher has been a positive for momentum and all the daily indicators are still positive and looking strong, however drilling down into the hourly chart you start to find a slight bearish divergence in the momentum which could suggest waning upside momentum. The hourly RSI, MACD lines and Stochastics are all showing lower highs at the same time that the price was pushing higher highs in the past couple of days. My expectation for gold has been that there would be another high posted between the resistance at $1260/$1288 as the medium term range play continues. This high from yesterday at $1271 could now start to become the resistance. The price is just off the highs today, but the support now at $1256.80 (yesterday’s low) will become important near term, as a loss could begin a correction again back into the $1248/$1234.50 support band. A move above $1271.30 would open the next resistance around $1282 which protects $1288.
WTI Oil
The near term correction has set in. The question now is how long will it last before the bulls resume control once more? With the daily RSI peaking over 70 there is a feeling that a minor correction wold help to renew upside potential again. The price has retreated from the high at $51.67 and unwound back towards the initial band of support between $49.90/$50.20. This move has helped to already unwind the stretched overbought near term momentum. However there is still room for further correction with the uptrend in place since mid-May today coming in between $48.90/$49.00. I do not believe that the correction would get that far though and there is a near term pivot around $49.50. The daily chart also shows that the RSI has tended to bottom in the low 60s too. Ultimately this will prove to be an opportunity to buy for further upside and a retest of yesterday’s high at $51.67, whilst the subsequent resistance is $53.90 and then $56.50. Key support remains $47.75 with the big 4 month uptrend support at $47.60 today.
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