Market Overview
After weeks of trading off Donald Trump and his tweets, markets got somewhat back to a more traditional steer yesterday, with sentiment moving on the mildly hawkish comments from Fed chair Janet Yellen. This has improved risk appetite again, with Treasury yields, the dollar and equities higher. In her testimony to the Senate Banking Committee yesterday, Yellen noted that the FOMC would need to hike rates again at one of the upcoming meetings if the data continued to trend as it has been doing so, and that it would be “unwise” to wait too long. The market has been pricing in just two rate hikes in 2017, compared to the Fed’s potential three as per the December dot plots, and the comments from Yellen have not massively changed this view, but slightly increased the chances. This has pulled Treasury yields higher as the probabilities of futures rate rises have increased. This has also driven a stronger dollar too. Perhaps the committee is mindful of the market still pricing in less than 20% probability of a rate hike and Yellen wanted to give them some more wriggle room? However, she did not say anything explicit that would point to a March hike and for a while all meetings have been considered to be “live”.
Wall Street closed higher yet again last night with the S&P 500 +0.4% at 2338, Asian markets also higher with the Nikkei +1.0% on yen weakness, and European markets also positive in early moves today. Forex markets show mild dollar strength continuing today, with the yen the standout underperformer, whilst it is also interesting to see the Aussie performing well again. Gold has ticked lower this morning but for now remains above the $1220 support. Oil is marginally lower.
There data that helps to paint a picture of UK inflation continues today with the UK wage growth as part of the unemployment data. Headline UK unemployment is at 0930GMT and is expected to stay at 4.8% with a mild increase in the claimant count by 1,100 jobs. However the Average Weekly Earnings will get more focus in light of yesterday’s increase in inflation to 1.8%. The expectation is that wages ex-bonus will stay at +2.8% Year on Year. However the big focus will come in the afternoon will be with US CPI inflation at 1330GMT. The headline inflation is expected to increase to +2.4% (from +1.8%) however it is interesting to see core inflation expected to dip slightly to +2.1% (from +2.2%). US Industrial Production is at 1415GMT and is expected to be flat on the month (having grown by +0.8% last month). The Capacity Utilization is expected to stay at 75.5%. EIA oil inventories are at 1530GMT and are expected to show crude stock grow by 3.4m barrels, distillates with a drawdown of -1.0m barrels and another drawdown of gasoline stocks by -1.0m barrels.
Chart of the Day – AUD/USD
The incredible outperformance of the Aussie continues. For now it is remarkable that the improvement in the dollar over the past week, which has been such a drag on other forex majors, has yet to notably impact on the Aussie. For the past week AUD/USD has been trading in a tight range between $0.7600 and $0.7700. The support at the near term breakout of $0.7600 is remarkable in that this level has been tested several times and held up. The fact that the support held yesterday as other majors were seeing supports broken on the back of Yellen’s testimony, reflects how strong the Aussie is right now. The momentum indicators may have just lost some of the upside impetus (nine sessions of consolidation will do that) however there have been no sell signals of any note on momentum indicators, with the RSI still above 60 and Stochastics picking up again. The hourly chart shows to play the extremes of the range near term and the oscillating hourly RSI can do this. A closing breakout from the 100 pip range would target 100 pips either way, but the bulls would need to negotiate massive resistance at $0.7777. Continued dollar strength should be a drag on the Aussie but the bulls are not giving up quite yet.
The strength of the dollar continues to pull the pair lower. The key support at $1.0577 was breached on an intraday basis but the sellers could not drive for a close below, however it seems as though it is only a matter of time. The downtrend continues and the negative candles continue to rack up. The momentum indicators are corrective with the RSI falling back towards 40 now, the MACD lines in decline and the Stochastics also negatively configured. This is all reflected on the hourly chart where the RSI consistently fails between 50/60 and hourly MACD lines fail around neutral. Intraday rallies are a chance to sell with a minor resistance band $1.0590/$1.0635 today. The pivot at $1.0710 remains the key resistance. A close below $1.0577 would open the next key low at $1.0450 with the key low at $1.0340.
A miss on UK inflation and A stronger dollar from Yellen’s testimony has dragged Cable back once more towards the $1.2430 pivot. However, there really is a lack of overall direction currently with the RSI settled around 50 and the MACD lines flat. Yesterday’s bear candle has had a mild negative impact and gives the sellers a boost into today’s session, but until a decisive close below $1.2430 is seen then it will be difficult to play the downside with any conviction. This neutral outlook is reflected in the hourly chart with the momentum indicators oscillating and exhibiting range play characteristics. The resistance is growing between $1.2550/$1.2600. Cable needs a catalyst.
After a period of consideration around the resistance at 114.00, the dollar strength on the back of Janet Yellen’s testimony managed to break the shackles and re-open the upside resistance at 115.60. The move is confirmed on the momentum, with the MACD lines pulling higher from a bull cross, the Stochastics rising strongly and the RSI above 50 for the first time in five weeks. The hourly chart shows the negative divergences having been broken from yesterday’s strong run higher. The breakout above the old pivot at 114.00 now means that this will now be seen as a basis of support for any weakness today. The key low is now at 113.20 which was above the 112.85 higher low. Expect corrections to now be seen as a chance to buy for a move to test 115.37 and the key medium term resistance at 115.60.
Gold
Considered to both be safe haven plays, moves on the yen and gold have been very similar in recent times, so it is perhaps a surprise that the yen upside break was not mirrored on gold yesterday. Gold continues to hang on to the breakout support at $1220, despite being tested on each of the past three sessions. Will the gold bulls manage to continue to hang on to the support if the dollar continues to strengthen? I find it unlikely. Technically though the momentum indicators have rolled over but lack conviction to form any real sell signals. This is reflected in the consolidation on the hourly chart that has formed a range of around $15 over the past few sessions. Hourly momentum indicators are neutral and rangebound. A close below $1220 would open the downside once more with initially $1215, $1207 and the old pivot at $1200 back in play. The resistance is growing between $1234/$1237 with the key high at $1244 now.
WTI Oil
The choppy range on WTI oil continues with another retracement day of a previous session yesterday. However, that retracement lost momentum into the close and another slip back was seen, to reflect the fluctuating neutral outlook, with little suggestion that this will be the beginning of a trending move. Continue to use rallies as a chance to sell and dips as a chance to buy. The Bollinger Bands continue to trade around the 20 day moving average with flat bands at $51.75 on the downside and $54.20 on the upside. There has been support that has formed over the past three sessions between $52.75/$52.90 and once more today this is back in play and is protecting the support at $52.20 but also the pivot at $52.00. From the bull perspective, it is still noticeable that resistance continues to grow above $54.00. Only one session has seen a closing price above $54.00 in the past two months, despite as many as 14 intraday moves above the resistance. Hourly chart indicators suggest continue to trade oil as a range play.
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