Dovish Fed sends dollar sharply lower, huge breakout on gold

Market Overview

The era of Fed tightening is coming to an end and this is driving significant moves across major markets. Although the FOMC held rates steady, the signals given in last night’s announcement say that its first rate cut is on its way and more are likely to follow. The FOMC is no longer “patient”, but is now ready to “act as appropriate”. With Powell then spending much of his press conference speech talking about negative global growth signals, softer data deterioration and also the growing argument for rate cuts, the market has taken this as a confirmation of positioning for future rate cuts. A cut in 2019 is increasingly likely now, but the Fed also cut 50 basis points off its 2020 projection for the Fed Funds rate. There has been a decisive shift move lower on Treasury yields, with the 10 year yield falling below the psychological 2%. The dollar has sold off sharply in response, but the biggest mover seems to be in gold. After years struggling to overcome the band $1348/$1375, a massive breakout on gold this multi-year resistance is being seen. With commodities higher, there is also bull traction forming on equities (despite Wall Street stuttering into the close yesterday). Major markets are certainly moving on the Fed. However, there are other central bank decisions to consider too. The Bank of Japan held rates at -0.1% (no change expected from -0.10% on rates), whilst also maintaining the yield curve control of the 10 year around zero. Attention will be on the Bank of England later this morning, however, few surprises are anticipated.

Wall Street closed only marginally higher despite the dovish Fed last night. The S&P 500 +0.3% at 2926, whilst US futures are calling for a positive open today , currently around +0.4%. This has all helped Asian markets higher overnight, with the Nikkei +0.6% whilst the Shanghai Composite is +2.2%. European markets are also strong in early moves, with the FTSE futures +0.3% and DAX futures +0.5%. In forex, the big move is one of dollar weakness continuing. The question is for how long? USD remains weaker across the forex major pairs, with marginal NZD outperformance and marginal AUD underperformance. In commodities the big mover is gold which is up another 1.5% this morning, whilst oil has also broken out as it adds over2%.

Traders will be looking towards the UK for some economic data and some post-FOMC respite this morning. UK Retail Sales at 0930BST on an ex-fuel basis are expected to fall by -0.4% in the month of May (-0.2% in April) which would pull the year on year reading back to +2.5% (from +4.9% in April). The Bank of England monetary policy is at 1200BST and is not expected to show any surprises. The MPC is expected to stand pat at +0.75% on rates (+0.75% in May) with the MPC minutes expected to show the decision to be unanimous with all 9 voters on hold (9-0-0 in May). The US Current Account deficit will take focus in the afternoon at 1330BST. There is expected to be a small improvement in the deficit to -$124.6bn in Q1 (from -$134.4bn in Q4). Weekly Jobless Claims at 1330BST are expected to stay around last week’s level at 220,000 (from 222,00 last week). The Philly Fed Business Index for June is also at 1330BST and is expected to slip to +11.0 (from +16.6 in May). Eurozone Consumer Confidence for June is at 1500BST and is expected to remain at -6.5 (-6.5 in May).

 

Chart of the Day – EUR/GBP    

An interesting corrective move is developing on Euro/Sterling. After weeks of outperformance of the euro in this cross, the move is beginning to show signs of reversing. Our position is still somewhat negative for sterling generally, but it seems that the euro is under more pressure now (in the wake of Draghi). EUR/GBP has turned a corner around the old £0.8940 pivot with a couple of bear candles. These negative sessions are now significantly impacting on momentum indicators which had been waning in recent sessions. A decisive decline on the RSI is coming as bear crosses appear on MACD and Stochastics. The move is pulling back to the old pivot at £0.8840. Watch out for the progression of momentum indicators though as there is plenty of downside potential if the correction begins to gather impetus. A close below £0.8840 would open £0.8780 but also the next key pivot at £0.8690 in due course. The hourly chart shows increasingly corrective momentum setting in now and near term rallies are a chance to sell. There is a band of initial resistance between £0.8890/£0.8925.

 

EUR/USD

Although the euro had already been creeping higher in a recovery, the dovish FOMC signals have really shifted sentiment on EUR/USD once more. Although yesterday’s candle was somewhat choppy into the close (c. 30 pips off the day high) the rebound has continued early today. A test of the old pivot around $1.1265 is being seen. Sometimes there is a need to see where the dust settles on a chart. There is clearly a bounce in progress, and near term traders will be looking to piggyback on it. However, recent signals have been very messy on EUR/USD, with lots of conflicting moves. Essentially, the pair is trading within a clutch of fairly neutral moving averages again. So once the dust settles on this dollar slip on the Fed, then a better gauge of outlook can be ascertained. Momentum indicators are again looking to swing around on the daily chart, once again in need of settling. The hourly chart shows a support band $1.1220/$1.1240.

 

GBP/USD

As many currencies paired with the dollar, sterling is on the rebound. This move has driven Cable strongly higher. A huge bull candle yesterday has continued into this morning. Clearly this is a shift in sentiment which is playing out, at least near term. The technical resistance levels are being taken out, one by one. With a move back above $1.12650 this morning, the bulls will now be eyeing the key near to medium term resistance band $1.2755/$1.2760. Daily momentum indicators are ticking higher again. However, it is important to be aware that this is a near term move playing out. The momentum outlook is consistently negative on a medium term basis. RSI has risen sharply but is still under 50, MACD lines are ticking higher but under neutral, whilst Stochastics are also gaining. Near term buy signals have been triggered, but is this any more than a rebound to be sold into? Resistance is significant in the band $1.2760/$1.2860 and this is likely to be a renewed opportunity to sell in due course.

 

USD/JPY

The consolidation is breaking down again. The negative outlook of the downtrend channel, falling 21 day moving average and momentum configuration is all pulling Dollar/Yen lower. RSI is back under 30 and given the acceleration of deterioration in daily candlesticks, this looks to be a decisive move which still has legs. Although a minor support, 107.50 from January is a level to watch. A close below 107.50 would mean there is very little support until 105.00 area. A close below 107.80 today will add to the negative sentiment. It would also leave 107.80/108.15 as an area of overhead supply, with intraday rallies as a chance to sell.

 

Gold

Gold seems to be the way to play this dovish Fed meeting. A decisive closing breakout above $1348 yesterday has stepped up massively into today’s session. It seems as though the shackles are coming off. The resistance of the past five years between $1348/$1375 which has housed numerous key high failures, is being broken. This is the gold market’s reaction to the Fed signalling a turn to cut rates for the first time this decade. The next resistance is at $1391 from 2014. Technically this is a hugely positive move, holding the run higher and accelerating. However, there is always a caveat with such a move, with the RSI into the 80s (very rare and not seen since February 2016). How the candlestick closes today could also be key. Recent sessions (aside from last night) have tended to lose momentum unto the close. A solid bull candle would reflect a continuation. The breakouts at $1375 (2016 high) and $1366 (2018 high) are supportive. Above $1391 opens levels not seen since 2013 (with a high of $1433).

 

WTI Oil

After Tuesday’s sharp rally kicked in (on Trump’s confirmation of a meeting with China’s Xi), the bulls consolidated yesterday. Although the market closed a shade lower yesterday, there is an appetite to buy into weakness now, as the market has stepped higher again today. A decisive pull higher today has now broken above the resistance at $54.85. This bodes well for the near term outlook. Happy to now support the market, a close above $54.85 would confirm a small $4.25 base pattern which would imply a recovery towards $59.10 in due course. Further confirmation of this move gathering momentum would be a move above the 38.2% Fibonacci retracement at $55.55 which would open the 50% Fib at $59.60. The bull cross on MACD and Stochastics continue to encourage. The hourly chart shows a band of support forming at the breakouts of $54.40/$54.85.

 

Dow Jones Industrial Average

Given the dovish turn from the Fed, perhaps it is a bit surprising that Wall Street did not take more of a boost. However, with a gain of just 38 ticks (just under +0.2%) the Dow posted a very neutral looking candle. Whilst the bulls will have clearly been looking for further confirmation of the upside breakout above 26,249, this was a day of consolidation. With momentum indicators bullishly configured, the bulls remain in the driving seat. Bullish futures suggest this is going to be another positive open today. The RSI is into the mid-60s, MACD lines now rising above neutral and Stochastics strong. Weakness is a chance to buy. The hourly chart shows initial support from yesterday’s low at 26,415 whilst the breakout at 26,249 is also supportive. The market continues to position for a test of 26,695 whilst the all-time high of 26,951 is also realistic for a bull run with this medium term momentum configuration.