Market Overview
After the weakness in the wake of this week’s FOMC minutes, the dollar is bouncing back. Once more, driving the move is a hawkish FOMC member (this time John Williams) who has talked of his view that waiting too long to raise rates further could damage the economy.
Treasury yields have stabilised and the dollar has since looked to unwind some of its recent losses. However, how long can this dollar rebound last for?
This still looks to be a near-term blip as there is still much scepticism that the US will be hiking rates this year. Markets could now start to look towards Janet Yellen’s Jackson Hole speech next Friday for some sort of idea what the doves on the FOMC are thinking, as it would appear that they are still holding the balance of power.
The stronger dollar is impacting across forex markets, with commodities also under a little corrective pressure early today. Equity markets have also stuttered with the S&P 500 (+0.2) only able to show mild gains as Asian markets have traded mixed overnight (Nikkei +0.4% on a weaker yen). European markets are mildly lower as yesterday’s rebound has lost impetus.
Forex markets show dollar outperformance against all the major currencies, with the relatively high-risk Aussie the underperformer today. The recovery in sterling on the back of the impressive UK retail sales has just started to stall slightly with the dollar strength. Gold and silver are mildly lower on the dollar strength, however once more the oil price is stronger.
There is little economic data due today aside from the UK public borrowing numbers from the UK Government at 0930BST, with -£1.2bn expected. Canadian CPI is at 1330BST and is expected to drop to +1.3% on the headline year on year (from +1.5%).
Chart of the Day – GBP/JPY
Is sterling building for a recovery? The move on Cable shows a sharp rally against the dollar, and now against the yen there has been a breach of the downtrend that has been previously dragging the pair lower in the past four weeks. The move has left a low at 129.22, which is mildly higher than the key July low at 128.82. However, now there needs to be a continuation of the move otherwise the bulls will quickly be overpowered again.
The daily momentum indicators have started to improve but again this needs to continue. The Stochastics have ticked higher giving the prospect of a confirmed buy signal, whilst the RSI is also pushed higher. The hourly chart shows that there are some reaction highs that need to be taken out that could signal a small near term base.
Key resistance is at 132.50, which would signal a first important breach, whilst the resistance is strengthened at 134.00. The bulls need to also build from the support bang on 130.00 and continue the recovery. Hourly momentum is more positively configured now. Look for the hourly RSI holding above 40 and the hourly MACD line consistently above neutral.
The buyers have continued to pull the euro higher with another strong bullish candle, which added 65 pips on the day and maintains the strength of the breakout. Momentum indicators continue to improve with the RSI into the mid-60s and the strongest since the early May spike high to $1.1614. The Stochastics also are managing to maintain their move higher, as are the MACD lines.
An interesting near-term resistance has come into play though, with the underside of the old uptrend channel now acting as a barrier as the early move today has been one of caution. This resistance is around $1.1360 today and is the only real resistance that is now preventing a return to the pre-Brexit high at $1.1432. There is little reason not to view corrections on the euro as a chance to buy, and looking at the hourly chart there is still a strong configuration across the hourly momentum and dips are being bought into.
The rising 55 hour moving average (around $1.1300) is a decent gauge for support and this $1.1300 level was also supportive intraday yesterday. Key near-term support is at $1.1240 which was a low in the wake of the dovish FOMC minutes on Wednesday. There is little reason not to expect the bulls to regain their poise and push above $1.1365 (yesterday’s high) and towards $1.1432.
The outlook for Cable for the near term looks to be turning around, and today could be a key day in whether this is the case. A second strong bullish daily candlestick (driven by the strong UK retail sales data) in the past three days has pulled sterling through the key near term resistance at $1.3060 and looks to be having a key impact on the momentum.
Stochastics are now rising strongly, whilst the RSI is back towards 50 and the MACD lines are starting to tick higher again. This strong candle needs to be backed by a confirmation move that the bulls can sustain a move higher. The RSI failed at 50 in a recovery in late July, so a move above 50 needs to be maintained.
On the hourly chart, I have talked about the resistance of an old pivot at $1.3160 and the resistance at $1.3175. This resistance at $1.3175 remained intact yesterday and the price has just slide slightly. The bulls need to decisively breach $1.3175 to really open the recovery. It would mean $1.3280 is back in play again near term.
Ultimately though I still see rallies as a chance to sell, and with the daily chart showing a downtrend linking the post Brexit highs at $1.3305 and the 23.6% Fibonacci retracement of the Brexit sell-off at $1.3323, I think this rally is a short-term move. It is just that it could have further legs to run from here. The old resistance band $1.3060/$1.3100 is now supportive.
A close below 100.00 yesterday should be a key psychological blow for the bulls, but for now they are still hanging on. A bearish candle completed yesterday, but the bulls have responded again overnight with another retracement. It could all be rather a futile effort though as the outlook remains bearish, with momentum extremely negative and little real sign of any recovery for now.
Although the sellers are not smashing the price lower there is still a sense of selling into rallies. The old resistance around 100.65 (the old range lows) is once more an area of overhead supply whilst up to 101.15 is an ideal sell-zone still. The near-term bears would remain in complete control until a breach of the old pivot level at 101.65. I continue to expect pressure on the 99.53 recent low and the post Brexit low at 99.08.
Gold
The near- to medium-term trendlines continue to converge and gold is still unable to make the breakout. There is still a slight positive bias which leans me towards expecting an upside break, but I am still a touch concerned over the bulls’ inability to break through the resistance at $1358. Once more, yesterday this barrier could not be overhauled and the early slip back in the price again reflects the frustration the bulls must be facing.
A natural break will come soon with the trendlines which are now at $1339 and $1357, but the closer they come together the less relevant a breakout is (the Bollinger Bands for example are still around $46 apart at $1319 and $1367, so not pointing to an imminent breakout).
In truth, gold is ranging now between $1330 and $1358, and until there is a decisive closing breakout then it is very difficult to read too much into any moves. A catalyst is needed it would seem.
The bulls just keep on running. Another impressively strong candle (up 3% on the day) completed yesterday was a sixth consecutive bullish session and confirmed the corrective move of June/July is now well and truly in the past. The move through the 9 week downtrend, above the 21 day moving average and breach of resistance at $46.93 all signals that the bulls are increasingly strong.
The break through resistance means that it opens the next band of resistance which is between $50.00/$50.50. The momentum is strong still, with the RSI pushing through 60 to its highest since the price peaked at $51.67. The hourly chart also shows that the intraday dips continue to be bought into, with old breakout levels continuing to be used as a basis of support on the next session.
Key near-term levels to watch are now around $47.00 and down at $46.10, whilst the rising 21 hour moving average at $47.95 is also an interesting gauge of support. Buying into weakness continues to be the way to play this bull run.
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