Dollar mild rebound but is it a chance to trade the trend again?

Market Overview

The market trends that had developed through the thin trading conditions of the holiday period seemed to be confirmed yesterday. The dollar remained under pressure, with equity markets looking to find support again and the gold rally continuing to climb. The manufacturing PMIs continued to show a recovery in global economies and with yields pulling higher the expectation is that the Fed may soon find company in the department of tightening monetary policy. Treasury yields are rising again, with the 10 year yield back up to 2.46% but other major economy yields are also stronger. This move out of government debt is helping to underpin equity markets but also is hampering the dollar at the same time. Major currency pairs such as EUR/USD and GBP/USD are eying a test of key multi-year highs, whilst gold also continues to trend higher. The Christmas period is always a difficult time to gleam too much sustainable sentiment from but with the S&P 500 and NASDAQ again posting all-time highs on their first session of the year, it seems that the consolidation has been a time to draw breath before going again. Can this run continue though, with the barrier of key resistance looming large on major forex pairs. Furthermore, AUD/JPY is a good gauge of market sentiment and is threatening a correction. Could this be a harbinger for a near term shift in sentiment again? It is too early to say for sure, but as the US dollar sees a mild rebound this morning these moves have tended to be seen as another opportunity to trade the trend recently.

On Wall Street the S&P 500 up +0.8% at 2695, whilst Asian markets were also broadly higher again. European markets look to be finding support this morning too. In forex, there has been a mini rebound for the dollar which is pulling the euro back, whilst the commodity currencies are also dropping back a touch today. This comes with commodity markets slipping slightly as gold drops $5 and oil is consolidating marginally lower.

On the economic data front, after yesterday’s miss on the UK Manufacturing PMI, traders will be keeping half an eye on the UK Construction PMI at 0930GMT which is expected to tick very slightly higher to 53.2 (from 53.1). Construction only accounts for around 7% of the UK economy but still another miss would be a negative bias for sterling. The US ISM Manufacturing is at 1500GMT and is the key data point of the day, expected to tick very slightly higher to 58.3 from 58.2 last month. The FOMC minutes for the December meeting are at 1900GMT. The emphasis will be slightly reduced as the rate hike and press conference have already been known, whilst the voting intentions change in 2018. Despite this, any hint of changes to the outlook for inflation will be yields and dollar sensitive.

 

Chart of the Day – AUD/JPY 

Since a rally kicked off in early December the market has rebounded over 4% in an impressive bull run. However the consolidation into the New Year has posted a couple of negative candles and now the market has broken a four week uptrend. A strong intraday correction back from a ten week high of 88.40 along with another negative candle now questions the longevity of the bull run. The daily RSI is now beginning to cross back below 70 and the Stochastics have also rolled over which suggests the bulls may be losing their momentum. This is reflected on the hourly chart with the hourly RSI and MACD lines yesterday dropping to their lowest since 8th December. The initial support at 87.75 was breached yesterday and a consistent decline below this level would add to potential corrective momentum again. A move below 87.40 would begin to open for a new trend lower and a retreat towards the medium term pivot at 86.50 could then be seen.

 

EUR/USD

The strong run higher seen over the holiday period has been confirmed as a large positive candle posted a further 50 pips of gains on the first real trading day of the year. Subsequently, the dollar bulls remain under significant strain as the market pushes higher to test the key September high at $1.2092. This comes amidst strong upside momentum with the RSI into the low 70s, MACD lines accelerating higher and the Stochastics in strong configuration. Intraday corrections continue to be used as a chance to buy as the market positions for a sustained press on $1.2092. A breakout would be a three year high and open initially $1.2165 which is the 50% Fibonacci retracement of the big ECB QE driven sell-off, whilst the next real price resistance is at $1.2245. The strength of momentum reflects a decisive trend, but it should also be kept in mind that EUR/USD very rarely sustains an RSI over 70, which may also limit the immediate upside potential.

 

GBP/USD

An impressive run higher continued yesterday as traders brushed past the resistance at $1.3540 with a strong bull candle that added over 80 pips on the day. With the market again looking positive in early moves today, a move on the key resistance of the September high at $1.3655 is building. The momentum indicators are configured positively, with the RSI pushing into the high 60s, MACD lines having crossed higher and the Stochastics lines also strong. The breakout at $1.3540 becomes an initial basis of support, whilst the hourly chart shows that corrections continue to be a chance to buy. Any moves to unwind the hourly RSI towards 50 or the MACD lines towards neutral are seen as a chance to buy now.

 

USD/JPY

The sellers are on the brink of gaining a real foothold in this market now as the support at 112.00 is coming under significant scrutiny. A closing breach of the support would complete a four week top pattern and change the outlook once more within the medium term trading range. It would confirm the development of a new trend, with a lower high and lower low, whilst also implying around 160 pips of correction lower. Yesterday’s bear candle continues a sequence of negative sessions where once more, the dollar bulls are struggling and intraday rallies are being sold into. Initial resistance at 112.80 before a pivot around 113.00. Daily momentum indicators are deteriorating and are beginning to lead the market lower. Below 112.00 the next support is 111.40 and then 110.85.

 

Gold

What is an increasingly impressive bull run on gold continues. Yet another strong bull candle was posted yesterday to see the market breaking decisively clear of the long term pivot band $1300/$1310. The uptrend of the past three weeks remains firmly intact and the momentum indicators remain strongly configured. The question is really now of how long the run can go without a correction. The RSI is over 70 now but in this instance, and given yesterday’s breakout above key resistance, this should not necessarily prevent the run from continuing. This is clearly a strong trending move and the RSI was above 70 for well over a week in September’s bull run. An early drop back this morning is however a warning to the bulls, but if the support of the pivot and breakout around $1300/$1310 can kick in then this is a near term buying opportunity. The uptrend support is at $1299 today. Initial resistance is at today’s high of $1321 with additional at $1334 and then $1357.50 the key September high.

 

WTI Oil

The run higher over the past few weeks has added over 8% to the price of WTI and a move to the highest level since mid-2015, but can this run continue? There is an uptrend channel in place which comes in around $62.00 currently, whilst momentum indicators remain positively configured. The RSI is stable in the high 60s with MACD lines rising and Stochastics strongly configured. Yesterday’s decline on the day along with an intraday sell-off asks a few questions and puts the immediate upside in doubt. However there is a basis of support $58.55/$59.05 for any initial correction. The resistance is now initially at $60.75 but main resistance comes in at $61.80/$62.60 and the way the outlook is configured this is a likely test in due course. The hourly chart shows that throughout the rally of the past few weeks the hourly RSI has been steady and positively configured above 35, so a drop below this level would reflect a deterioration in sentiment.

 

Dow Jones Industrial Average

The bearish engulfing candle that ended 2017 on a bit of a sour note is still a near term factor for the outlook of the chart, however it is still likely that this will be a brief pause in the bull run rather than the beginning of a sustained correction. The failure to breach the 24,876 December higher was seen on 31st December and now again with the opening session of 2018 is though a near term concern for the bulls. This came as the early jump higher on Wall Street was sold into and the market failed to breach Friday’s high of 24,872. However, the market still managed to post a gain on the day despite a rather neutral looking candle to start the year. The corrective configuration on the momentum indicators continues to suggest that the bulls are struggling to regain momentum still. The cross lower on the MACD lines is the main concern, but the longer that the RSI maintains the cross back below 70 the higher the prospects of a price correction will grow. The support at 24,708 remains important near term as a closing breach opens for a further 170 ticks of near term downside. A move to new all-time highs above 24,876 would abort the immediate prospect of a correction and open further upside.