Dollar strength across the majors as gold breaks down

Market Overview

The dollar is starting to regain some strength as traders begin to prepare for Non-farm Payrolls data tomorrow. The Dollar Index has now broken a four week downtrend and is now starting to build a run of higher lows and higher highs, which is are early stages of a new uptrend. This comes as EUR/USD seems to be breaking down near term in a move below $1.1800. There is another market that is making a remarkable move. Gold has broken below $1260 to a four month low. This comes despite the geopolitical tensions in the Middle East being ratcheted up by President Trump as he has formally recognized Jerusalem as the capital of Israel. This is a somewhat incendiary move to many parties in the region and has caused wide concern in the international community. Despite this though the 10 year Treasury yield has picked up this morning and the US dollar is trading positively against the Japanese yen, with little traction for safe haven assets. This comes with markets looking ahead for tax reform progress, as the US Congress moves forward to conference the two versions of the bill which were passed by the House and the Senate. Furthermore, a decent read through from the ADP employment change yesterday sets up for a Non-farm Payrolls tomorrow, where with a rate hike nailed on for December, a dollar positive/risk positive reaction would meet a positive surprise in the data.

Wall Street closed marginally lower (S&P -1 tick) last night as the recent corrective pressure slowed. This was also reflected in a rebound on Asian markets (Nikkei +1.4%) whilst European markets are also marginally positive at the open. In forex, the US dollar is performing well across the majors, although it is interesting to see the decline on sterling seems to possibly be slowing, whilst the Aussie and Kiwi remain under pressure. In commodities, a stronger dollar is hitting gold which is now breaching $1260 support, whilst oil is looking to consolidate yesterday’s sharp decline.

Traders will be looking out for the final revision to Eurozone Q3 GDP which is forecast to stay at +0.6%. US Weekly Jobless Claims are at 1330GMT and are expected to once more stay around recent levels at 241,000 (238,000 last). ECB President Mario Draghi is speaking at 1600GMT with Bunds and the euro likely to move. The final reading of Japanese Q3 GDP is at 2350GMT and is expected to be revised slightly higher to +0.4% (from the previous reading of +0.3%).

 

Chart of the Day – DAX Xetra 

The DAX has been in a very choppy trading range between 12,810/13,209 now for the past four weeks. Every time the market has rallied into a pack of resistance 13,100/13,200 there has been selling pressure, but equally, every time a correction has dropped below 12,920 the buyers have supported. And so it has been again yesterday with an incredible candle formation. An initial 150 tick gap lower at the open found support at 12,865 and the buyers once more saw an opportunity to play the range. Looking at the daily momentum indicators there is little agreement, with the RSI oscillating between 38/55 for the past four weeks, the MACD lines falling and Stochastics rising.  The hourly chart shows the slightest negative bias but there is in fact very little overall direction of late and yesterday’s intraday rebound into the close has been encouraging for the bulls. With the market back into something of a no-man’s land between 12,900/13,100 it seems to be a market searching for direction still.

 

EUR/USD

With a fourth consecutive negative close, fourth bear candle and a closing breach of $1.1800 the outlook for EUR/USD seems to once more be turning corrective. This now means that since the November two month high at $1.1960, the market has now posted a lower high at $1.1940 and a lower low below $1.1807. This is the makings of a new trend lower. The momentum indicators also agree, with the RSI now dropping back below 50 today, whilst the MACD lines are posting a bear cross and the Stochastics are tracking decisively lower. Having breached $1.1800 the market is now on a path back towards the next key reaction low of the former uptrend at $1.1712. The hourly chart shows that rallies need to be seen as a chance to sell with the hourly RSI failing in the 50/60 range, MACD lines failing under neutral. The overnight rebound to the old support around $1.1807 is already failing and the market is set to test yesterday’s low at $1.1780 before tracking further lower. There is now a band of key resistance building at $1.1850/$1.1880 near term.

 

GBP/USD

With the dollar strengthening and the political outlook on Brexit yet to yield any deal, Cable remains under pressure. The market continues to drop back towards the support of its medium term breakout at $1.3335. Momentum indicators reflect this correction with a drift lower on the RSI towards 50 and the Stochastics now tracking lower. Having taken so much effort to breakout to the upside of the two month range above $1.3335 it will be interesting to see how the bulls react to this retracement. For now we see intraday rallies being sold into as the hourly chart shows a consistent failing at lower levels. The falling 55 hour moving average (at $1.3410) has become a basis of resistance with the hourly MACD lines consistently under neutral and the hourly RSI failing at 50/60. There is resistance at $1.3400/$1.3415 initially with $1.3460 looking key. However there is a big caveat to this decline, which is a key deadline for a deal between the UK and the EU which is tomorrow and any political improvement in this will see sterling sharply higher. One to keep very close to the headlines.

 

USD/JPY

Having looked at one stage yesterday to be taking a significant shift once more to a negative near term outlook, the dollar bulls have regained a degree of control in the outlook on Dollar/Yen. Recovering from yesterday’s low at 112.00 the bulls have pulled the market higher again this morning. A close around here would once more bring the market into a neutral outlook with a slight positive bias. This comes from the RSI hovering around neutral, whilst the MACD lines have just posted a bull cross and the Stochastics are rising. The pivot resistance around 113.00 is holding the market back from turning bullish once more within the medium to longer term range. The improvement in the past 24 hours has seen the hourly technicals take on an improving outlook once more too. Initial resistance is now 112.85, as the importance of the support at 112.00 grows.

 

Gold

Gold is breaking down. Having retreated to find the support at $1260 earlier this week, the key October low has now been breached this morning and gold seems to be making a key move to the downside. There needs to be confirmation of this move but the deterioration in the momentum indicators certainly suggests that this is a key move. The minor support at $1251 is next up to be tested, however a decisive close below $1260 would complete a $40 range breakdown and subsequently imply $1220 in due course, whilst a retreat towards the key lows around $1200 should not be ruled out. The MACD lines are now fining traction to the downside having crossed lower earlier this week, whilst the Stochastics are in bear territory and the RSI is confirming the range breakdown at their lowest since July. A disappointing Non-farm Payrolls could derail this downside break but technically the move looks strong.

 

WTI Oil

The market has fallen sharply in the wake of the EIA inventories that showed crude inventories falling but strong increased in stocks of refined products. The results has been a sharp bear candle and on a technical basis WTI is turning increasingly corrective now. The bearish candle formed yesterday has decisively broken the support of a six week uptrend whilst also seeing the 21 day moving average (which has been supportive) tick lower. The breach of support at $56.75 is also a concern as this is a lower high and a lower low forming now and the potential for further downside is growing. Trends on momentum indicators are medium term indicators, but both the RSI and MACD lines breaking multi-month uptrends to confirm a move lower is a concern for the bulls now. The outlook of the past few days would suggest that rallies are increasingly now being sold into, with the hourly chart momentum indicators increasingly correctively configured. There is now a near term resistance band $56.75/$57.30 which is a selling opportunity. A retreat to the bottom of the uptrend channel and the key support at $54.80 could now easily be seen. The resistance of Tuesday’s high at $57.92 is now taking on added importance near term.

 

Dow Jones Industrial Average

The outlook for the Dow has turned near term corrective. The negative candles of the past few sessions have seen the market pull back from the all-time high posted on Monday at 24,534 and correct now over 350 ticks as the profit-takers have taken some of the cream off the top. This move is not bearish and is currently simply just a correction within a 12 week uptrend (which is supportive today at 23,740, but clearly there is still room to run in an unwinding move. The RSI has turned lower whilst the Stochastics have also moved down, with both on the brink of a near term corrective signal. The hourly chart reflects this near term negative bias now with the negative divergence on the momentum, however the hourly indicators are quickly unwinding and yesterday’s only marginal down day suggest more of a settling of recent selling. It will be interesting to see now how the bulls react to an intraday rebound. If support can begin to build and hold then the bulls can begin to think of buying opportunities. Friday’s low at 23,922 is initially supportive, with 24,350 now initial resistance.