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Forex Markets In Consolidation As The Dollar Bull Run Stalls

Published 23/11/2016, 08:38
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Market Overview

Ahead of tonight’s FOMC minutes, the forex markets have entered into a period of consolidation as the strong dollar bull run has just stalled in the past few days. With the rise in the US 10 year Treasury yield taking a breather, the US dollar rally has run out of steam, at least temporarily. This is driving a consolidation across forex majors, but with the dollar having rallied 10% against the likes of the yen in the past couple of weeks there is still the prospect of a corrective move.

Despite this though, US equities continue to pull higher, with the Dow hitting 19,000 for the first time ever and the S&P 500 over 2200 for the first time ever. This is dragging the European markets higher too but they are yet to breach key resistance levels and it will be interesting to see if the DAX can manage to break through the 10,800 level which has been so difficult in recent months.

The FOMC meeting minutes tonight will be interesting for signs of just how hawkish the committee was leaning before Trump’s reflation rhetoric came to impact expectations. The impact of the minutes may be a little subdued as things have moved on so significantly since the FOMC meeting at the beginning of November. In the UK, Chancellor Phillip Hammond (finance minister) holds his first key economic speech in the UK Autumn Statement where he is expected to announce more of a fiscal expansion than his predecessor George Osborne.

Wall Street closed higher again with the S&P 500 +0.2% at 2203, whilst Asian markets were broadly positive (Nikkei closed for public holiday). European markets are also looking positive in the early moves. In forex markets there is still a mixed outlook for the dollar, with the Aussie the main outperformer. Gold and silver have found some support today whilst the oil price is flat.

Traders will be looking out for the flash Manufacturing PMI and flash Services PMI for Eurozone countries early in the European session, with the Eurozone Flash Manufacturing PMI at 0900GMT expected to be mildly weaker at 53.2 (53.5 last) whilst the Flash Services PMI is expected to tick higher to 53.1 from the downwardly revised 52.8 las month. The UK Chancellor Peter Hammond gives his UK Autumn Statement at 1230GMT which will be interesting for sterling, gilts and UK based equities such as housebuilders.

US Core Durable Goods Orders are at 1330GMT and are expected to be +0.2% for the month. New Home Sales are at 1500GMT and are expected to tick mildly lower to 591,000 (from 593,000 last month). EIA Crude Oil Inventories are at 1530GMT and are expected to show an inventory draw of -0.5m barrels (versus last week’s larger than expected build of +5.3m barrels). The FOMC minutes at 1900GMT will be eyed for signs of the speed of tightening of monetary policy.

Chart of the Day – AUD/USD

The huge dollar bull run has also been very evident on the AUD/USD pair where the selling pressure has really impacted on the outlook. After the big bull trend of 2016 was broken a couple of weeks ago, a series of key supports have also been breached whilst the moving averages have all turned lower in bearish sequence.

The broken support will now pose a problem for the bulls as these levels will be restrictive for a rally as they will house old stale bulls waiting to square their positions. This means that between $0.7400/$0.7500 will be a big resistance zone now. Therefore, it will be very interesting to see how the market reacts to this technical rally which is developing.

Two strong bull candles have been completed and it looks like a third is going to be formed too. Momentum is turning round with a cross higher on the Stochastics and RSI ticking higher above 30. However there is key overhead supply at old lows of $0.7440 and $0.7500 ready and waiting. Look for a rally on the RSI to fail in the 40/50 area and if so the steam may quickly run out. The hourly chart is improving and if the hourly RSI can push decisively above 70 then perhaps some real momentum can be generated. For now though I am still a seller into strength and will be looking for the next sell signal for a retest of the low at $0.7305.

AUD Daily Chart

EUR/USD

There is a real see saw battle going on for control now. It had looked yesterday as though the euro was beginning to regain some ground as the dollar was showing corrective signs, only for the dollar to fight back but then lose control into the close. This formed an almost perfect doji candle (which denotes uncertainty) and we move into today with little further clarity of the next direction. The momentum indicators still need to show more in terms of signalling a recovery with the RSI still stuck below 30 and the Stochastics struggling to tick higher.

The hourly chart shows the market is stuck below the $1.0663 overhead supply as hourly momentum becomes increasingly rangebound. The euro is now in a small range of about 90 pips which means that the next break either way (below $1.0567 or above $1.0658) on a decisive basis would imply a 90 pips immediate move. However more importantly it would generate direction after a period of consideration by the market. That would be a break worth backing. Key support remains at $1.0538 and then $1.0456. Resistance is $1.0710, $1.0800 and $1.0850.

EUR Daily Chart

GBP/USD

Cable is still hanging on to the band of support around $1.2330, but only just. Monday’s bull candle was retraced yesterday and the early moves suggest sterling weakness which is likely to put pressure on the support at $1.2330 once again today. The momentum indicators are uncertain however the more sensitive Stochastics reflect a mild negative bias. The hourly chart also shows a corrective bias having broken back below the $1.2450 pivot but there is still decent near term support between $1.2330 and $1.2380, the latter of which was again tested and held yesterday.

A decisive breach of the support between $1.2300/$1.2330 would confirm the bear control for a drop back towards the lows of the October trading range at $1.2080, however for now we await the next catalyst. That could come from today’s UK Autumn Statement which could drive volatility in the afternoon. The resistance remains in place at $1.2515.

GBP Hourly Chart

USD/JPY

Even though the dollar correction is yet to materialise there has certainly been a slowing of the uptrend. The last two sessions have posted highs within a pip of each other at 111.36 which is just underneath the resistance of the highs from April and May between 111.45 and 111.90. Again, today’s candle shows a lack of drive forward and the potential for a corrective move remains. The RSI has turned lower from 80 as the first sign of a slowing of the trend.

Watch also for the Stochastics to start to turn lower too which was also be a signal. The hourly chart shows that an uptrend that had formed during the run higher has now been breached and is being used as the basis of resistance, whilst the 21 and 55 hour moving averages have flattened off. The negative divergences on the hourly momentum indicators continue to develop.

It is very important not to call a top before it is confirmed as it could just be a consolidation. Therefore it is difficult to get too excited about a corrective move until the support at 109.75 is breached. This is the first key reaction low in the trend higher. Initial support is 110.23. Below 109.75 opens 108.50.

JPY Hourly Chart

Gold

As the dollar was strengthening yesterday afternoon it had looked that the key $1200 support level on gold was going to come under pressure. The pressure eased into the close and only a slightly negative candle, that was more of a consolidation move, was left. This consolidation continues today with mild early gains. The market is clearly considering the next move (although it is still likely to be driven by the next move on the US dollar). The technical indicators remain bearishly configured but are consolidating.

Yesterday’s high at $1221 is the initial resistance which is protecting the $1233 main near term resistance. The hourly chart configuration of momentum suggests that rallies continue to be seen as a chance to sell and there is a negative bias. I am a seller into strength for further pressure on the key long term support at $1200. Initial support is yesterday’s low at $1205.90 and then $1203.50. Below $1200 opens $1190 and $1170, whilst there is considerable overhead supply between $1241 and $1247.

XAU Daily Chart

WTI Oil

Yesterday’s attempt to continue the push higher turned into a bit of a disappointment for the bulls as an attempted rally drifted away into the close. The daily chart shows a slightly negative candle formation which filled the opening gap higher following the contract roll over. However, the outlook for WTI has improved in the past few days and holding above the support at $46.50 will retain a positive bias to the chart now. Momentum indicators have an improving configuration with the Stochastics rising and the MACD lines having just crossed higher, whilst the RSI is also above 50.

The failure to hold a move above $48.75 is a disappointment and that would signal a strong outlook for a test of the highs again. The hourly chart shows support now at yesterday’s low of $47.17 is the first marker point. The market is though into the realms of being newsflow driven in front of OPEC which will drive volatility in the coming days. Corrections should be seen as a chance to buy. The outlook would turn negative below $44.55.

CLc1 Daily Chart

DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

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