Dollar rallying and safe havens reverse on improved geopolitics and Fed’s Dudley

Market Overview

The dollar is rallying with the safe haven bid unwinding as geopolitical tensions wane and Fed member Dudley has talked up the prospect of another rate hike this year. There are subsequent reversals of the gains on assets such as gold, the yen and the Swissy. There has also been a sharp rebound in Treasury yields as the attraction of US government debt wanes. This is helping to pull the US dollar higher, with the Trade Weighted Index picking up. However there is more that needs to be done to suggest that the dollar is going to sustainably engage a recovery, and that is likely to be data driven. New York Fed President William Dudley, a key FOMC voter, helped to support the dollar yesterday as he discussed a potential third rate hike this year. Focus will be on US Retail Sales today after recent data disappointments. The combination of all this has been a sharp Dollar/Yen rally and gold in decline. These two were going to be under pressure as the geopolitical tensions unwound and so it is proving the case. Equities have also been boosted from the improvement in risk appetite and increased yields.

Wall Street closed strongly last night as the S&P 500 jumped 1% to 2466, with the gains also reflected on Asian markets (Nikkei +1.1%) and European markets are looking solidly higher today. In forex, the US dollar is showing broad strength, with the yen being the big underperformer. The euro is also weaker as the correlation between EUR/USD and the Bund/Treasury yield spread seems to be resuming. In commodities, gold is down around $7 (0.5%) whilst oil is licking its wounds around flat after yesterday’s sharp decline.

Focus today turns to UK inflation and the state of US consumer spending. UK CPI is released at 0930BST and is expected to tick back up slightly to +2.7% on the headline (from +2.6% last month) and up to 2.5% on core (up from +2.4% last month). Also watch out for the UK PPI input prices which are expected to continue to fall away and would help to suggest that the currency effect on inflation is continuing to unwind. Sterling is likely to show increased volatility on the inflation data. In the US session, US Retail Sales are at 1330BST and are expected to improve by +0.3% on an ex-autos basis having fallen by -0.2% last month. The New York Fed Manufacturing at 1330BST is expected to stay around last month’s level with +10.0 (+9.8 last month). The NAHB Housing Market Index is at 1500BST and is expected to tick slightly higher to +65 (form +64 last month). Today is also a bank holiday in France and Italy.

 

Chart of the Day – EUR/JPY

The downside pressure has been mounting over the past week on EUR/JPY as the market has started to consolidate. This consolidation now takes the form of a five week range as the market trades between 128/131.40. Although the sellers have been positioning for a test of the support of the range between 128/128.50, this level that was tested at the end of last week only to survive. Now, with a couple of positive candles over the past two sessions, the bulls are beginning to rebound once more. The RSI is again picking up from mid-June lows, as are the Stochastics. These would be key medium term signals if they continue to hold and alludes to the support 128.128.50 also holding with Euro/Yen at a key crossroads. Holding on to 128 (on an intraday level) and 128.50 (on a closing basis) will continue the range and help sustain the medium term bull control, whilst a breach would complete a top pattern and imply around 290 pips of further downside. The hourly chart shows a head and shoulders base pattern completing above 129.60 which is a near term pivot. Another higher low above 128.90 support will add to the confidence.

 

EUR/USD

Yesterday’s negative candle has just halted another bullish advance and puts a more neutral slant on the near term outlook. With the momentum coming out of the rebound off the support around the old breakout of $1.1711, the market is increasingly turning into a consolidation play. The momentum indicators retain a strong medium term configuration, however the RSI is dropping below 60 this morning and Stochastics ticking lower. There is no explicit suggestion that there will be a marked correction yet, especially as the breakout support around $1.1711 remains broadly intact (especially on a closing basis), but the bulls have just taken the foot off the gas for now. This is reflected on the hourly chart with a clutch of broadly neutral moving averages and momentum indicators just dropping away this morning but nothing yet to suggest increasing downside momentum. With US Retail Sales today perhaps there will be increased volatility, but breaching the $1.1745 support re-opens the spike low at $1.1687. Today’s high is $1.1792, whilst resistance is building at $1.1845 under the key high at $1.1909.

 

GBP/USD

The market continues to drift as a run of contradictory candles stretched into five completed sessions. However there is a marginal negative bias to the move, with the momentum indicators still corrective. The RSI below 50, MACD lines falling away and the Stochastics now consistently below 20 suggest that the near term strength is being sold into. This puts the added pressure on the late July low of $1.2930. The close of yesterday’s candle towards the low of the day will only add to the downside pressure and today’s early signs are that this downside pressure on $1.2930 continues to build. A closing breach would be the first breach of a key higher low within the previous uptrend, confirming the formation of a new trend and also arguably complete a small head and shoulders top pattern. This would at least then open the July low at $1.2808. However, the hourly chart shows less conviction in the bears, despite the drift. There is increasing near term resistance in a range $1.3030/$1.3060 that the bulls need to breach to begin to reverse the slide.

 

USD/JPY

It looks as though the reducing geopolitical tensions are having a significant impact on the yen which is now being sold to drive Dollar/Yen higher again. A strong bull candle yesterday is being followed by strong early gains today and the bulls are beginning to develop some significant improvement in momentum. A downtrend of the past five weeks has been broken, whilst momentum indicators are ticking higher. Traction such as the RSI above 50, an MACD bull cross and the Stochastics rising at a 5 week high would all point towards a more sustainable recovery. Overhead supply is being broken now too. Where the 109.80 old support was resistance intraday yesterday, this has now been decisively broken, as has 110.20 on the hourly chart. The market is increasingly positively configured and positioning for a test of initially 110.60, however the big indication of a recovery would be a close above 111.00. Having decisively broken above it, 109.80 now becomes initially supportive and the significance of leaving a low at 108.73 (effectively at the June low) should not be ignored either.

 

Gold

Just as the safe haven flow is reversing out of the yen, we see a similar picture on gold. Yesterday’s negative candle is being backed by another push lower today. The market has already reversed back to the previous breakout at $1274 and is now testing a support band of old highs $1271/$1274. My expectation that the market would unwind on the improvement of the geopolitical tensions over North Korea seems to be coming to fruition. A breach of $1271/$1274 support would then re-open the $1260 old pivot support. The momentum indicators are beginning to deteriorate again, but have not yet posted any confirmation of bear control. Look for the RSI below 50, a bear cross on the MACD lines and the Stochastics falling below 65. Intraday rallies are now being sold into, with the series  of lower highs on the hourly chart, topping out below $1281. Another lower high today below $1286 would increase the corrective pressure, whilst hourly momentum is more negatively configured now.  Initial resistance is $1278/$1281.

 

WTI Oil

It looks like Friday’s rebound was simply a delay to a corrective move as another strong bear candle has dragged the price clear below the recent consolidation. This arguably completes a small top breakdown and implies around $1.80 of downside towards $46.50. The move is also now seriously testing the support of the 8 week uptrend. The bull concern grows with the negative signals now being shown on the momentum indicators with sell signals posted on both MACD lines and Stochastics. The hourly chart shows negative configuration now on hourly RSI (failing around 60) and MACD lines (failing around neutral), suggesting that rallies are now a chance to sell. The key test will be the $47.00 medium term pivot support. The resistance of yesterday’s bearish engulfing candle high at $49.15 is now a lower high below $50.43.

 

Dow Jones Industrial Average

The bulls have bounced back after the recent corrective pressure and means that there is a 21,843 which is growing in importance now. With the uptrends all intact the market has picked up from above the three month uptrend and the support of the rising 21 day moving average. Initial support is now yesterday’s low at 21,945 whilst there is a small gap open at 21,911, although unfilled gaps are a common sight on the Dow. Should the bulls maintain their rebound momentum,, there is little real resistance now between a retest of the old highs again at 22,179.