Market Overview
The recovery on the US dollar remains on track as Janet Yellen last night all but confirmed that the FOMC would go ahead and hike again in December. The Fed chair said that it would be “imprudent to keep monetary policy on hold until inflation hit 2%”. This suggests that the Fed is now playing a game of chicken with its 2% inflation target mandate. Instead the central bank is now more interested in normalisation of monetary policy. In effect Yellen is suggesting that low inflation could be here for a while.
The impact of this was to push shorter dated 2 year yields to record highs, and whilst the 10 year yield was also higher, a “bear flattener” continues on the yield curve. Whilst Yellen’s comments are positive for short term yields, it could also point to lower terminal rates from the Fed. Despite this, the Dollar Index now stands on the brink of a key turnaround as a six month downtrend is breaking to the upside this morning. Holding above 93 on Dollar Index could become key now. This all comes as key major pairs such as EUR/USD, USD/JPY and GBP/USD all start to find traction in favour of the dollar bulls.
Wall Street has started to form some support once more, with the S&P 500 closing all but flat at 2497, whilst Asian markets were mixed overnight (Nikkei -0.3%) whilst European markets also look to form support too.
In forex, the dollar is gaining across the major pairs with sterling weakness becoming the standout underperformer. With the dollar strength last night we saw gold falling into the close, but the yellow metal is broadly flat so far today.
Oil has been supported, trading up around half a percent as suggestions continue that Turkey could turn off the tap to a pipeline to the Kurds in Northern Iraq
It is another quiet morning for European economic data and the US Core Durable Goods Orders at 13:00 BST is first in focus. The expectation is that ex-Transport Durable Goods will grow by +0.2% on the month (down from +0.6% last month). US Pending Home Sales are at 15:00 BST and are expected to fall by a further -0.5% (after falling by -0.8% last month). The EIA oil inventories are at 15:30 BST and are expected to show crude stocks to build by a further +1.8m barrels, whilst distillates are expected to drawdown by -2.5m barrels and the gasoline stock drawdown by -0.8m barrels.
The Reserve Bank of New Zealand will announce monetary policy at 21:00 BST and is expected to hold rate steady at +1.75%.
Chart of the Day – USD/CAD
The pair has been drifting higher in a recent recovery. This is an interesting pair as there will be conflicting forces at work, with the general dollar recovery fighting against the positive read through on the Loonie from an oil price rally. The dollar recovery is winning over at the moment, but the rebound on USD/CAD has reached something of a crossroads now. The old key floor of the July low around 1.2410 is a previous support that is now a basis of resistance. The rally hit this resistance and backed away yesterday on the first look. However, the overnight reaction would suggest the bulls have not given up yet. The market is also at a confluence of resistance with a three month downtrend also a barrier at this level. The momentum indicators have been improving in the past couple of weeks but it is interesting to see the RSI also back around 50 which is around where the rallies have failed since the big sell-off began back in May (specifically in June and again in August). The market is at a key junction then and a close back above the 1.2410/1.2440 resistance would begin to show a near term improvement turning into something more medium term. The resistance at 1.2662 would then be open. The hourly cahrt shows strong momentum configuration with the 144 hour moving average supporting the lows. The market has posted a series of higher lows in the past couple of weeks, the latest at 1.2310 whilst the support at 1.2250 needs to hold to continue this nascent uptrend.
EUR/USD
The euro has completed is top reversal pattern. A close below $1.1820 has formed a one month head and shoulders top that implies a downside corrective target of 270 pips in the coming few weeks towards $1.1550. This comes as the market has also broken the uptrend channel support that has been a guiding hand for the past five months. Momentum indicators are increasingly corrective with the MACD lines accelerating back towards neutral, whilst the Stochastics below 20 reflect the near term negative momentum and the RSI at the lowest since April. The key test now becomes the August low at $1.1660 as a breach of this support would really add the momentum to a correction, being a second key reaction low broken. The neckline of the top pattern now becomes resistance at $1.1820 and there is a near term “sell zone” between $1.1820/$1.1860. Technically the lower reaction high at $1.2030is the level to watch for bull control as a series of lower highs and lower lows is now in formation.
GBP/USD
The support of the recent 200 pip range had been creaking at $1.3450 but the market seems to now be on the drift lower and increasingly into correction mode. As yet there has not been a decisive close below $1.3450 to confirm the breakdown, but the move in the past few days is all but suggesting that this is the case. Intraday breaches have been decisive and the market is again decisively below in early moves today. A closing break of $1.3450 would imply 200 pips of downside towards $1.3250 and a retreat to the key July high at $1.3265 would be on. The momentum indicators are now beginning to find some traction in a correction too, with the Stochastics beginning to pull lower and if the sell signal is confirmed by a sell signal on the MACD lines the correction is on. The hourly chart shows a run of lower highs is also developing now below the key $1.3655, with $1.3570 and now $1.3515. Hourly momentum is also increasingly corrective with the hourly RSI failing under 60 and the MACD lines under neutral. There is little support until $1.3265, other than a minor level at $1.3330.
USD/JPY
The yen strength never really looked decisive on the recent correction and the support has come in once more above 111.00. The sharp uptrend since the September low at 107.30 was always going to struggle at some stage but the bulls are seemingly set to leave another higher low in place at 111.45 as yesterday’s bullish candle has re-asserted the recovery. Finding support above the moving averages is a positive signal, whilst the momentum indicators retain a strong configuration with the RSI above 60, MACD lines still rising above neutral and Stochastics above 80. A retest of the recent high at 112.70 is back on now as the market has opened with gains today. The hourly chart shows the trend break to be a consolidation and with the hourly RSI consistently finding lows around 30 there is a sense that this is a consolidation to help develop for the next bullish break. There is a minor pivot at 111.85 which is a basis of support for intraday corrections to be bought into now. An upside break above 112.70 implies 125 pips of breakout and re-opens the key July high at 114.50 again.
Yesterday was a key test of the market position on gold. The safe haven bid is the main factor preventing a continued gold correction for now, and a hawkish sounding Janet Yellen has pulled the price lower once more. A strong bear candle has cancelled out Monday’s bullish rebound for gold, reasserting the overhead resistance and putting pressure back on the downside once more. I talked yesterday about a renewed close below $1300 being a bearish signal for gold and this has now been seen. Rallies are a chance to sell, with the lower highs racking up and the long term pivot band $1300/$1310 seemingly once more being watched. With the rally failing yesterday at $1313.50 the overhead pressure is mounting. The momentum indicators have resumed in their corrective configuration with the RSI failing at 50, MACD lines falling and Stochastics set below 20. There is a near term floor of support between $1287/$1290 that needs to be broken, but once this is gone, the market should continue to correct back towards the support band $1267/$1278.
WTI Oil
Having broken strongly higher on Monday the bulls just took their foot off the gas during yesterday’s session and the market just corrected back slightly. However WTI is still a strongly configured in an ever improving bull trend and corrections remain a chance to buy. This comes with momentum indicators strongly configured with the RSI in the mid to high-60s, MACD lines rising strongly and the Stochastics positively configured. A higher low above the $50.50 breakout will be considered a good opportunity for the bulls to re-enter a strong market. The uptrend comes in today at $50.40. The hourly chart shows the buyers tend to resume control around 40 on the hourly RSI and around neutral on hourly MACD lines which shows a strong configuration. The bulls seem to be reacting positively once more and yesterday’s low at $51.45 is initially supportive for corrections to be bought into.
The recent drift lower back from the new all-time high at 22,420 will help to renew upside potential and give the bulls another higher low for a chance to buy. The trend channel is supportive at 21,945 today but any unwind into the support band of the breakouts at 22,039/22,179 looks to be a good entry point. However, the market is merely drifting slowly back at the moment and even with the rising geopolitical tensions there seems little appetite to sell for now. A mild negative candle yesterday with a small real body shows that the bulls are still in a good position. The hourly chart shows the hourly RSI and MACD lines have already unwound. Initial support is now 22,219, with resistance at 22,369.
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