Dollar pares losses but for how long?

Market Overview

The concerns over the rhetoric from Donald Trump’s protectionist based inauguration speech has hit the dollar this week. A strong decline on the trade weighted dollar index into the close yesterday took it to its lowest since 8th December. This comes with US Treasury yields dropping sharply back again and the 2s/10s spread dropping back again. There has been a mild paring of the losses on the dollar as we move into the European session today, but for how long as there is still a feeling that this will be a move that will be sold into once more. Comments from Steve Mnuchin, Trump’s choice for Treasury Secretary, warning of an “excessively strong dollar” will do little to help a dollar rally from gaining traction.

Equity markets have been mixed throughout and having fallen yesterday are mildly higher in early moves today. This comes after Wall Street closed slightly weaker (S&P 500 -0.3%) with mixed moves in Asia (Nikkei -0.6% on the sharp gains on the yen). Forex majors show the dollar rebound across the majors today with Sterling the biggest underperformer. Gold is mildly lower with the dollar strength whilst oil is just over half a percent higher.

The UK Supreme Court will deliver their Brexit ruling at 0930GMT on whether the UK Government has the right to trigger Article 50 without a vote in the UK Parliament. A ruling in favour of Theresa May’s Government means that a triggering of Article 50 can be made smoothly by 30th March. If the Government loses then the whole issue becomes a lot more complicated. Sterling, Gilts and UK equities will be volatile in the wake of the decision.

There is a range of economic data releases through the day which could have an impact on markets and the flash Eurozone PMIs. The Eurozone flash Manufacturing PMI is at 0900GMT which is expected to dip slightly to 54.8 (from 54.9), whilst the Eurozone flash Services PMI is expected to tick mildly higher to 53.9 (form 53.7). The US Flash Manufacturing PMI is at 1445GMT and is expected to improve slightly to 54.6 (from 54.3) with Richmond Fed manufacturing index at 1500GMT expected to tick lower to +7 (from +8) and the US Existing Home Sales at 1500GMT expected to drop slightly to +5.54m (from 5.61m).

 

Chart of the Day – USD/CHF

Dollar/Swiss has been breaking down for the past week with a move below the key support at 1.0018. The support was breached on a closing basis throughout last week to confirm a big top pattern that implies 0.9780 in the next few weeks. However the market had been supported above parity throughout last week but this was broken yesterday with another strong bear candle that closed below 1.0000 and simply continues the run of lower highs and lower lows. The momentum indicators are also increasingly negatively configured with the RSI dropping below 40, the MACD lines the most bearish since August and the Stochastics also turning increasingly negative. The hourly chart shows that parity was a basis of resistance during yesterday’s session whilst the negative configuration of the hourly momentum shows that rallies remain a chance to sell. There is a resistance band to watch now today between 1.0000/1.0030. The next downside support is 0.9950 and then 0.9840.

 

EUR/USD

The dollar remains under pressure as EUR/USD closed yesterday’s session almost 80 pips higher and now well clear of the previous breakout resistance at $1.0710/20. This puts the market now on course for a test of the next key resistance at $1.0850/$1.0870. With the past three sessions all closing near to the high of the day, the bulls are in control and intraday weakness is consistently being pounced upon. The early drop back today should prove to be another such opportunity. Momentum indicators and increasingly strong with the RSI now well into the 60s and the highest since August, whilst the MACD lines are now rising above neutral again the first time this has happened since August. The hourly chart shows the market is being supported at higher levels and the old breakout resistance is now supportive around $1.0710 with the pivot at $1.0670 also adding to the support. The bulls would question control below $1.0625 and confirm a loss of control below $1.0577.

 

GBP/USD

After several weeks of being under constant pressure, the bulls have taken on a new lease of life in the past few days. With three bull candles in a row, each of which have closing levels near to the day high, the outlook has certainly improved. The upside impetus has in fact broken above the key resistance at $1.2430 on a closing basis to arguably form an inverted head and shoulders pattern which would imply 450 pips of additional upside and would mean a test of the key range high at $1.2775. Technically the market has improved with the RSI the highest since December and the MACD lines now ticking strongly higher. The next resistance band comes with the December range $1.2550/$1.2775. The market is lower in the early moves today which may turn into a pullback to the neckline at $1.2430T. However, the main caveat for the bulls is not technical, rather the UK Supreme Court decision today at 0930GMT. The court will rule on the legality of whether a Parliamentary vote is needed in order to allow a triggering of Article 50. If the decision goes in favour of the Government (no vote necessary, which is not expected, not by yesterday’s breakout is anything to go by) then there could be a significant drop in sterling, pulling Cable lower again. Any decision that holds up the triggering of Article 50 would be sterling positive. As such it could be another volatile session today. The hourly chart shows minor support around the breakout $1.2430/$1.2460. The next resistance band comes with the December range $1.2550/$1.2775.

 

USD/JPY

The dollar bears came back with force yesterday with the strong bear candle which saw the market almost 170 pips lower and back to test what is now becoming key support at 122.55. The trend lower that has formed in the past few weeks continues and momentum indicators are becoming increasingly correctively configured. The RSI is failing under 50, whilst the MACD lines have today both starting falling below neutral. The hourly chart shows the market bounced from 112.50 having very briefly breached the 112.55 support but in effect this support remains intact. The hourly chart also shows a series of lower highs in the past few days and that rallies should be seen as a chance to sell. Yesterday’s high is the initial resistance at 114.05 with the resistance then at the 114.35 top pattern neckline. A decisive breach of 112.55 would continue the market to test the next support within the old uptrend at 111.32.

 

Gold

With three positive sessions in a row, the market has again pulled away from $1200. An attempted breakout above the previous $1218.60 could not be sustained in yesterday’s session which closed mildly back below the resistance. Today’s mild drop back on the gold price comes as the dollar has just pared some of its recent losses, however I only see this as a brief move and see further upside as likely on gold. There is resistance at $1221 from the previous sell off and this is the barrier to clear in order to open $1233 and then more importantly the $1241/$1250 old key lows which would be an area of overhead supply on a longer term basis. The daily momentum is still set up in positive configuration with the RSI consistently above 60, MACD lines rising above neutral and Stochastics firmly above 80. The hourly chart shows a near term pivot around $1209/$1211 to watch on a corrective move today. The support around $1200 is still important with $1187.50 key.

 

WTI Oil

Despite the opening gap higher on the chart, the move was the rolling over to the new contract and the market actually ended up closing almost a percent lower and leaving a negative candle. This drop has once more maintained the neutral outlook on the medium term basis. The momentum indicators are flattening off with the RSI now oscillating between 45/55 and the MACD lines settling down just above neutral. The price could not break above $53.50 yesterday which is now growing as resistance. However, equally there is a pivot around $52.00 which the price bounced above on an intraday basis (from $52.20), leaving an uncertain outlook. The hourly chart shows that a range is developing between $50.70/$53.50, with the $52.0 pivot a near term indicator. There is a mild positive bias within the range and a break above $53.50 would open $54.30 with $55.25 key.