Dovish surprise from Powell drives the dollar back lower

Market Overview

Traders have completely turned their view on the dollar once more as Fed chair Powell has opened the door wide open to  rate cuts by the Federal Reserve. In his Congressional testimony, Powell talked about the impact of the slowing global economy, the ongoing trade dispute and muted inflation. Powell seems to have been far more dovish than expected. Coupled with a set of FOMC minutes which suggested that many on the committee were open to more accommodative monetary policy, a July rate cut is now a foregone conclusion. It is just a question of size. The potential for it to be a 50 basis points cut is elevated, although still not likely (around 30% probability on Fed Funds futures). With a 10 basis points decline on the US 2 year Treasury yield, the dollar has come under pressure across major pairs. A sharp rally on gold, along with Wall Street pulling all-time highs (3000 on the S&P 500 has been hit for the first time ever). Has this called the top for the dollar in 2019? Traders will be looking at the US CPI data today to confirm the “muted” inflation that Powell talks about. If there is a downside surprise (especially in the core reading) there will be an even greater pricing for a 50bps cut, and in turn additional dollar weakness. Away from the dollar there has also been a breakout on oil. Powell’s dovish comments could be construed as positive for demand, but of greater significance are supply issues, with oil platforms being evacuated in the Gulf of Mexico and further threats to oil tankers from Iran in the Persian Gulf.

 

Wall Street took Powell’s dovish comments and ran with them. The S&P 500 was +0.5% higher to 2993 (which also included an intraday peak of 3003). US futures point towards additional upside today and this has helped Asian markets higher with the Nikkei +0.5% and Shanghai Composite +0.1%. European markets are set for a boost at the open with the FTSE futures +0.2% and DAX futures +0.3% higher. In forex, the move out of USD is continuing, with underperformance across the majors. It is interesting to see outperformance of JPY on this move. In commodities, gold is holding on to its sharp gains from yesterday, with oil another +0.5% higher.

US inflation dominates the economic calendar today, however, before that the ECB Monetary Policy Meeting Accounts at 1230BST will give an idea of the ECB’s thoughts on a move towards easing policy. After Fed chair Powell’s testimony focused on “muted” inflation, how will US CPI for June fare at 1330BST today? The consensus forecast is for headline CPI to drop to +1.6% (from +1.8% in May), with core CPI expected to remain at +2.0% (+2.0% in May). Also look out for Weekly Jobless Claims at 1330BST which are expected to stay around current levels at 223,000 (221,000 last week).

With Fed speakers in focus throughout this week, today is the turn of the FOMC’s Randal Quarles (voter, centrist) at 1830BST.

Chart of the Day – USD/CAD

A very interesting period of trading on USD/CAD has the market at a key crossroads. A trading band of 110 pips between 1.3035/1.3145 has formed. Yesterday’s session almost perfectly summed up the crossroads. A hugely volatile session with wild swings throughout (an apparent dovish lean from the Bank of Canada and a dovish confirmation from Fed chair Powell). The outcome seems to be pushing for dollar weakness as the market edged to the range lows again. However, momentum indicators have been threatening to form recoveries, so this is not a cut and dry scenario pointing to a downside break. Hourly chart momentum indicators are still in a ranging configuration. How the market responds to 1.3035 will be key. There is a near term resistance at 1.3080 to watch today. A move above would suggest a swing back higher once more. A decisive close below 1.3035 opens 1.2920 initially.

 

EUR/USD

In the wake of Powell’s dovish testimony, another big shift in pricing for the dollar has seen the outlook swing around once more. The strong bull candle yesterday, being followed swiftly by additional upside today shows how there is legs in this move now. A move back above the pivot line at $1.1265 is a strong signal and means the overhead resistance levels are under threat. Momentum has swung around, with the RSI picking up off 40 (again) and back above 50 today. MACD lines are bottoming around neutral and Stochastics are also looking to post a bull cross buy signal. . How the bulls respond to an intraday slip will be a key indicator to the continuation of the move. The hourly chart shows the strength of the move, with the breakout this morning looking to build near term support $1.1250/$1.1265. If this holds then the next upside test is $1.1310/$1.1320.

 

GBP/USD

Clearly Jerome Powell’s dovish comments have had a massive near term impact across forex majors, so much so, that even Cable is rallying. A decisive positive session yesterday (the first in almost three weeks) is being followed by another today as a technical rally sets in. Technicians will point to the RSI again picking up from 30, a move which historically means a rebound to 45/50 at least. Stochastics are also threatening a bull cross. The hourly chart shows the first real technical barrier is the lower high at $1.2540. This comes just under the $1.2560 pivot. So there is a resistance band $1.2540/$1.2560 to overcome today. Hourly momentum is more positive for a rally. We continue to view near term strength is a chance for medium term selling opportunity, but this rebound looks to have legs in it for now. Initial support at $1.2490/$1.2500.

 

USD/JPY

The correction on the dollar in the wake of Powell’s dovish testimony has significantly shifted the near term outlook on Dollar/Yen and threatens to do some lasting damage to the recovery prospects now. Yesterday’s “bearish engulfing” candlestick (bear key one day reversal) has flipped the bears back into control. There has been a small uptrend channel which has been building the market higher over the past couple of weeks, and this has now been broken by further downside today. Momentum indicators are all rolling over, with the RSI back under 50 and Stochastics crossing lower. The hourly chart shows a breach of 108..15/108.25 which should now be seen as a pivot band of near term resistance. The key support of the recovery is the higher low at 107.50. If this were to be breached then the bears would be in full on control for testing the low at 106.75 again. There needs to be a decent reaction from the dollar bulls, or this could become a move that gathers decisive momentum.

 

Gold

We have talked about the elevated volatility on gold in recent weeks. The way that gold reacted to yesterday’s dovish testimony from Fed chair Powell, shows that this volatility remains a key factor.  Adding $21 into the close on a day range of $30 is a big move. Closing at the day high, gold has burst through several near term resistances (at $1400, $1410 and $1423) to salvage what was an increasingly corrective near term outlook. Subsequently, the volatile three week range between $1381.50/$1439 continues. Although stopping at $1426 this morning, there is little real resistance before a test of the $1436/$1439 highs. The hourly chart shows a degree of stalling of the move overnight which needs to be watched, but the bulls will be much happier now. Given the intraday volatility, there is a near term pivot band of support $1406/$1410 now.

 

WTI Oil

The stars aligned yesterday to give a massive boost to oil and a breakout on WTI. A dovish Fed, larger than expected EIA inventory drawdown, storm fears in the Gulf of Mexico and geopolitical tensions in the Strait of Hormuz. This all adds up to oil pulling strongly higher. WTI has subsequently broken the ten week downtrend, moved decisively above the 55 day moving average. Most importantly though, has been the breakout above the June highs. Resistance built around the 50% Fibonacci retracement (at $59.60) with a breakout above a pivot at $60. Momentum is more positive now as RSI ticks above 60, Stochastics turn higher and MACD lines begin to pull higher again from neutral. The question now is whether the breakout can be sustained. Will the 50% Fib become a basis of support. Subsequently, watch $59.60/$60 as a basis of support. If this can hold then the 61.8% Fib level at $63.70 is open.

 

Dow Jones Industrial Average

The bulls have returned to prominence with a positive close and a move to a new intraday all-time high. However, this has been a somewhat tentative move which saw a close 120 ticks below the day high and a few questions still left unanswered. Momentum indicators are positive, but it is difficult to call them bullish. The RSI holding above 60 is the main strong point, but MACD continues to threaten to cross lower, whilst Stochastics are hovering around positive territory. A closing breakout above 26,966 would certainly help to break the shackles, but this still looks to be a market with the handbrake applied. The higher low at 29,665 is the support to base around now and near term corrections are still a chance to buy. This is a market to still play with cautious optimism.