Morning Report: A Brief Pause For Breath On Recent Dollar Strength

Market Overview

The dollar is just taking what is likely to be a brief pause for breath after two strong days of gains in the wake of the tighter than expected outlook for the US rate hikes from the FOMC on Wednesday. Treasury yields are marginally lower today, which is driving the slight dip back on the dollar, however there is no indication that this move will turn out to be a minor blip in the run of dollar strength. The market is still in the process of pricing in the new expectations laid out by the Fed’s dot plots which suggest now three rate hikes in 2017 up from the previous expectation of two. Equity markets are relatively settled today in more of a consolidation open for European markets, whilst many of the markets that price against the dollar such as forex majors and gold are unwinding some of the dollar gains. However, do not expect this to last and the dollar bulls are likely to merely be biding their time for the next entry point.

Wall Street closed marginally higher after the previous session’s losses, with the S&P +0.4% at 2262. Asian markets were also mixed to slightly higher with the Nikkei +0.7%. European markets are also mixed to slightly higher. Forex markets show the minor clawing back of some losses against the recent dollar bull run, but no sign of any significant change in the trend. Similarly on gold and silver which are between 0.5% to 1.0% higher. Oil has also bounced slightly by less than half a percent.

Traders have a few economic releases to keep them interested through the day. Starting with the final Eurozone CPI at 1000GMT which is expected to stay at the flash readings for both the headline of +0.6% and the core inflation at +0.8%. The US Building Permits are at 1330GMT which are expected to dip slightly to 1.24m (from 1.26m) whilst the Housing Starts are also at 13330GMT and are expected to be 1.23m down from 1.32m last month.

Chart of the Day – NZD/USD

After the Fed hiked rates and signalled a stronger tightening cycle the dollar has been running higher again. The impact on the NZD/USD pair is that the crucial medium term support at $0.6950 is now back in range once more. This level of support has been holding firm for the past six months despite the ever strengthening of the dollar. However there is now a real risk of this being broken. A closing break would be a significant technical move as it would complete a six month head and shoulders top pattern. The implied target would then be for 530 pips of downside potential over the next couple of quarters. After two consecutive big bear candles in the past two days the bear momentum has been forming. The RSI turned back from under 60, the MACD lines are ready to cross lower at neutral and the Stochastics have just formed a bearish cross lower. The hourly chart shows that rallies are now a chance to sell and that pressure is growing. The hourly chart also shows that the support that had been holding through late November/early December at $0.7040 broke yesterday and will now be a basis of resistance for today. This means that there is a near term “sell-zone” between $0.7040/$0.7120 to watch for today as the hourly RSI unwinds to renew downside potential.

NZD/USD

EUR/USD

The euro has come once again under huge downward pressure against the dollar as the Federal Reserve raised rated and increased its dot plots. This has taken EUR/USD to its lowest level since January 2003, below the previous key low from March 2015 at $1.0456. There is now very little reason not to think that parity will be seen in the coming weeks/months. In this decline the bear momentum still has downside potential too, with the RSI not event below 30, the Stochastics falling again and the MACD lines just having crossed lower again. Under this scenario, rallies have to be seen as a chance to sell. Yesterday’s low at $1.0364 has seen a few buyers re-entering and the market has bounced slightly early this morning. However $1.0456 becomes an area of resistance and the lows between $1.0500/$1.0515 in the past couple of weeks are an area of overhead supply filled with bottom pickers who got it wrong. In truth though anything up to the resistance at $1.0660 would still be considered as a selling opportunity.

EUR/USD

GBP/USD

The Cable bulls lost control of the medium term attempted recovery yesterday as the uptrend that had been building over the past six weeks was broken by the second consecutive strong bear candle. The impact that this has had on Cable is that it is now trading at a two week low with a mild deterioration on the momentum indicators. In other words, nothing drastic that suggests GBP/USD is going to be breaking sharply lower yet. The market is under corrective pressure, but the old pivot and neckline of a base pattern at $1.2330 is still intact, and of course this means that the key medium term low at $1.2080 is also OK. The hourly chart will be interesting as this could reflect the mood of traders now, with the hourly MACD lines more correctively configured, unless the market can break decisively back above the old key support band which is now resistance between $1.2515/$1.2557 then the bears will increasingly be in control of this range once more. Yesterday’s low at $1.2372 is now supportive.

GBP/USD

USD/JPY

The incredible run higher on Dollar/Yen continues and shows little sign of any reversal. The fact that the momentum indicators on the RSI and Stochastics have been in “overbought” territory now for 5 weeks reflects the huge strength of the market that has rallied 1700 pips in that time. The two bull candles since the Fed rate hike have been just curbed in today’s early consolidation but this by no means suggests that there will be a correction on the way, more a pause for breath. The hourly chart shows any corrective move is seen as a chance to buy and there is initial support at 117.15/117.63. The history of this run higher shows that the previous breakouts are used as the basis of support, so the potential for a pullback to the 116.12 breakout is possible, however as yet there is no suggestion that the bulls are willing to give this up quite yet. Yesterday’s high at 118.65 is initially resistance, with 120/121.67 the next band of resistance.

USD/JPY

Gold

The recent trend lower is now into its fourth week of trending consistently lower with lower highs and lower lows. The latest break lower this week has taken the market to trading around the 76.4% Fibonacci retracement of the $1047/$1375 bull market at $1125. This means that this is a very important level as the next key downside break would open a 100% retracement back towards $1047. The momentum remains incredibly negative with consistent bear configuration on the RSI and Stochastics. Today’s early rebound seems to be once more just an unwinding move within the decline and will likely find significant resistance once again as downside potential is renewed. The hourly RSI shows that the rallies tend to fail around the mid-60s so there is room to unwind. There is initial resistance at $1135/$1144, whilst the recent downtrend comes in at $1157 today. Yesterday’s low at $1122 is supportive and also protects $1100/$1112.

Gold

WTI Oil

Having broken out above $51.93 earlier in the week, it has been disappointing that the bulls have not been able to hold on to the break. Wednesday’s strong bear candle continued with another corrective candle yesterday. However, it was interesting to see WTI all but hold on to the $50 level (yesterday’s low was $49.95) but now the key test is holding on to the support of the higher reaction low at $49.60.

The momentum indicators are just threatening to roll over again and a near term correction would be signalled if the market closed below the $49.60 support. The move would be confirmed on a break below the old support band $48.75/$49.20. The hourly chart shows the formation of a series of lower highs and lower lows in the past few days and rallies are being increasingly sold into near term. Yesterday’s reaction high at $51.50 is now the first line of resistance whilst the resistance band $51.85/$52.20 is now the key near term level the bulls need to overcome to reinvigorate the buying pressure.

WTI Oil

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