Dollar slips as bond markets question the hawkish Fed move

Market Overview

The FOMC decision to increase its Fed Funds target range by 25 basis points last night has resulted in markets whipping around. The Fed hike came with some hawkish tweaks to the dot plots and economic projections, however as the dust settles, the US bond traders have not been convinced and the dollar has suffered. The 10 year Treasury yield had a look at 3% and was unconvinced, falling back to 2.95% this morning. With shorter yields not dropping back as much, the yield curve subsequently continues to flatten, suggesting that bond traders are not convinced in the Fed’s confidence for growth moving forward. This turnaround has resulted in some profit-taking on dollar moves and markets threatening to turn against the greenback near term. The volatility on markets is likely to continue today with the ECB monetary policy decision following quick on the heels of the Fed. The euro has been bolstered by the expectation that the ECB will formally discuss winding down its own €4.5 trillion bond buying program. There is a split over the timing of the announcement which could be today, or in the July meeting (before the current Asset Purchase Program ends in September). My expectation is that the ECB will discuss it without a formal announcement this month. Draghi will be quizzed on this in the press conference and will guide towards the formal announcement being made at the next meeting. This is a very important first step towards normalisation for the ECB and given the recent political risk surrounding Italy and Spain, whilst data has not been great out of the Eurozone, there is no need to rush. Adding into the mix for a correction today, China data broadly missed estimates with Chinese Industrial Production dropping to 6.8% (+6.9% exp, +7.0% last), Chinese Retail Sales a big miss at +8.5% (+9.6% exp, +9.4% last) and Fixed Asset Investment also lower at 6.1% (7.0% ex, 7.0% last).

Wall Street sold into the close with the S&P 500 -0.4% at 2775 whilst futures are also ticking mildly lower today. Asian markets have responded negatively, with the Nikkei -1.0% and European markets are playing catch up on the Fed too are look lower in early moves. In forex, there has been a continuation on the dollar slip with underperformance across the majors with the exception of the Australian dollar which is reacting negatively to the Australian employment data which showed full time employment falling. In commodities, the dollar slip has allowed gold to rally back above $1300 but this is a key resistance area. Oil rallied yesterday in the wake of the surprise EIA inventory drawdowns and is consolidating that today.

The raft of key data and announcements continues today with the ECB, however traders will also be considering how the consumer is faring in the UK and US. UK Retail Sales ex-fuel is announced at 0930BST and is expected to show a recovery of +0.3% in the month of May to +2.5% for the year (+1.5% last month). The European Central Bank monetary policy decision at 1245BST is expected to leave rates unchanged at 0.0% on the main refinancing rate and -0.4% on the deposit rate, whilst Asset Purchases are expected to continue at +€30bn per month. However the big question is whether the ECB will formally announce its next move once the current APP ends in September. Mario Draghi is also sure to be grilled on the APP in his press conference at 1330BST. Also at 1330BST the US Retail Sales ex-autos are announced. Consensus forecasts suggest a US Retail Sales will grow by +0.5% for the month (+0.3% last month).

 

Chart of the Day – GBP/JPY

The strength of the recovery on Sterling/Yen is very similar to that of the recovery on EUR/JPY which we highlighted yesterday. Technically the set-up is also very similar. With a rebound of the past two weeks, the market has now broken an eight week downtrend. The market is also looking to build new support back above 147.00 which has been an area of overhead supply that is now being breached. The RSI needs to pick up once again following a consolidation around 50, but momentum indicators are broadly pointing to a strength in the recovery with a recent “bull kiss” on the Stochastics whilst the MACD lines also continue to improve. There is a sharp uptrend over the past couple of weeks which is supportive today at 147.30 but there is also a band of support building at 146.10/147.00. With a risk positive outlook on markets continuing, expect the bulls to continue higher to put pressure on the resistance at 148.10, above which would continue the more back towards the key May lower high at 150.00.

 

EUR/USD

The market reacted with an elevated degree of volatility to the Fed decision last night. Intriguingly, a more hawkish Fed has resulted in a spike lower only to then rebound for the market to push back towards the resistance band $1.1820/$1.1840. Perhaps there is some ECB watching out there, but more probably the market has looked at the minor hawkish lean and is not convinced (especially looking at the moves on the 10 year yield). This has driven EUR/USD back higher again, forming a bull daily candle into the close last night. The support at $1.1725 around the near term breakout has been bolstered and the bulls will be confident moving into today. On the daily chart there is still a consolidation between the support around $1.1725 and the pivot band $1.1820/$1.1840. Momentum indicators are reflecting this recent consolidation that still retains a mild positive bias of the recovery. The ECB is the next key volatility event and a close outside these support/resistance bands today will derive direction.

 

GBP/USD

The market has been forming a bearish drift for much of the past week, but a rebound into the close (amidst the FOMC volatility) pulled the market higher into the close. Not quite a bullish hammer candlestick, but still a decent reaction from the bulls last night and the supportive move has spilled over into early moves today. Primarily there is support now of a potential higher low at $1.3305, whilst momentum indicators are also reacting well. The main resistance for today’s session comes with the pivot that continues to act as a near term ceiling around $1.3450. Initially though, the bulls will be looking at the downtrend channel that has formed over the past five days on the hourly chart. It neds a move above $1.3425 to break a sequence of lower highs. Hourly momentum is beginning to look slightly more encouraging with this too. However, given how choppy the market has been during recent sessions, this remains a chart with little real conviction and needs to be treated with caution, especially given both the UK and US announce retail sales today.

 

USD/JPY

The reins were pulled again on the bull run yesterday as profit takers moves on the Fed decision. Initial gains in the wake of the FOMC were sold into and this has left resistance at 110.85 and arguably almost a shooting star candlestick. This move has been followed by a further slip back today in early moves. The drop back is now testing the support of the old pivot at 110.00, whilst the uptrend of the past two weeks comes in at 109.60 today. This would now be an important test for the near term outlook. I continue to see this as a medium term range building between 108.10/111.40 but the near term trend higher is still a positive force for recovery within the range. Momentum indicators are mixed to slightly positive and still suggest an appetite to buy into weakness. The hourly chart unwinding should give an opportunity again today. If the bulls pass up the opportunity, it could be an outlook changing move.

 

Gold

As with the forex markets, the moves on gold in the wake of the FOMC initially pulled lower (as yields and the dollar rose), but has since retraced that move. Gold subsequently formed a positive candlestick to cancel out Tuesday’s negative move, whilst the long term pivot band of resistance $1300/$1310 is once again being tested. Once more I have to mention that every time in the past few weeks the market moves above $1300, the bulls falter. Momentum indicators have lost any decisive direction as a result. The bulls will though be eyeing resistance at $1307.80 as a breach could be a trigger for something. The support at $1289/$1290 has been bolstered but we still wait for direction.

 

WTI Oil

With larger than expected drawdowns across the EIA inventories the oil price has been supported. This has pulled the market back higher once more and is now putting pressure on overhead resistance of the pivot at $66.65. This continues the run of gradual recovery that has been forming over the past seven sessions from the support of the lows around $64.25. Daily momentum indicators are beginning to tick higher once more as the prospects for recovery continue to improve. There is though still a level of overhead resistance with the $66.65 pivot, the 50% Fib retracement of the huge bear market at $66.90 and the underside of the old nine month uptrend (which is today at $67.20). The recovery needs to break through these levels to push on with conviction, whilst the bulls need to break above the lower reaction high at $68.65 to confirm the end of the corrective phase. Initial support is now with the higher low at $65.50.

 

Dow Jones Industrial Average

Following a consolidation earlier in the week, a solid bear candle formed yesterday which has begun a pullback correction. Interestingly, this consolidation is coming around the 61.8% Fibonacci retracement of the 26,616/23,345 correction at 25,367 and pulling lower from this could now mean that the 50% Fib level becomes a realistic retracement target around 24,980. However, although this week’s resistance at 25,402 has capped the gains, there is still an expectation that corrections remain a chance to buy. The mini-two week uptrend is breaking and the first line of support now becomes the old breakout at 25,086. Momenutm indicators have started to roll back with the RSI back below 60 and the Stochastics also threatening a near term sell signal. How the bulls now react in the next day or so to the slip could be crucial as to whether this is a correction that is bought into, or whether it is a move that begins to accelerate.