Hawkish Fed points to December hike, yields and dollar higher

Market Overview

The dollar has taken some significant strength on the back of a surprisingly hawkish Fed last night. No hike in rates was expected, as was the commencement of balance sheet reduction. However even in the face of continued concerns over subdued inflation, a hawkish Fed maintained its expectation of one more rate hike this year, most likely in December and a further three more rate increases next year. This desire to remain on course to normalise monetary policy pulled Treasury yields sharply higher with the 2 year its highest level since 2009 at 1.44%. Interestingly though the market concern over inflation has led to a mild flattening of the yield curve, with the 2s/10s spread lower. With the dollar rallying strongly yesterday, as the dust settles, if this flattening of the yield curve continues, will this be an issue the market starts to focus on?

As the European session takes over there has been a slight drop back in yields and the dollar advance has begun to stall. As markets settle, will this knee jerk dollar rally continue? It is interesting to see EUR/USD back towards key technical supports which are not yet broken. However, it is interesting to see the yen still weak and gold also still under pressure, with the latter breaching its key $1300 support. The Bank of Japan held rates steady as expected. Equities look to be supported today and despite Wall Street closing at further all-time highs (S&P 500 +0.1% at 2508) the Asian markets traded fairly mixed (Nikkei +0.2%).

Traders are continuing to digest the implications of the FOMC meeting decisions, however there are also a few minor economic announcements that could have implications for markets. The UK Public Sector Net Borrowing is at 0930BST and is expected to be +£6.5bn which would be the lowest August borrowing since 2005, having been persistently above +£10bn on every year since 2007 . The Philly Fed Manufacturing Index is at 1330BST and is expected to be strong again at +17.3 (last month +18.9), whilst Weekly Jobless Claims are at 1330BST and are expected to jump to 304,000 (from 284,000 last week). ECB President Mario Draghi is due to speak at a conference in Frankfurt at 1430BST.

 

Chart of the Day – NZD/USD 

It will be interesting to see how much of a game changer the Fed has been to this pair. Prior to the hawkish FOMC announcement, the Kiwi had been extremely strong and driving a technical breakout. Having consistently found resistance around the old $0.7345 high in recent weeks, two bull candles have broken the market through the overhead barrier. This move completes a five week head and shoulders reversal that implies an upside target now at $0.7540 which is within touching distance of the key July high of $0.7560. However the intraday decline back from yesterday’s high at $0.7433 has continued again today. There is an initial support band $0.7300/$0.7345 which would be an ideal “buy zone” and this has held the initial unwind to the neckline. The daily  momentum indicators still confirm the breakout move with increasingly positive Stochastics, accelerating MACD lines and RSI above 50. If the bulls can sustain this initial dollar positive reaction today then the base pattern will remain intact and this initial correction will be seen as a chance to buy. The bulls will be in control until the support at $0.7245 is breached. A breach of the key support at $0.7180 would abort the basing process.

EUR/USD

After seemingly having renewed the bullish momentum earlier in the week a bearish engulfing candle has shifted the balance of momentum negative once more. The Fed has been the driver and now the market is back at a key near term crossroads. The support of the five month uptrend channel comes in at $1.1830 today whilst the key support that has underpinned the market for the past four weeks is at $1.1820. Suddenly with yesterday’s bearish candle there comes a more concerning look to momentum and another negative sessions today will see this deterioration develop further. The RSI has dropped to 50, whilst the MACD lines are now tracking lower and Stochastics are also dipping. This all suggests that the reaction of the market today could be crucial to the medium term outlook. A decisive breach of $1.1820 would complete a small top pattern and imply 270 pips of further correction in the coming weeks. $1.1660 remains the key support medium term. The hourly chart shows resistance in the band $1.1900/$1.1910 initially, and then above $1.1950.

GBP/USD

The surprisingly hawkish Fed resulted in an intraday sell-off of over 120 pips into the close and a bearish candle has impacted on the outlook. It is interesting to see the past three sessions have all seen closes within 15 pips of each other, even though the market has been somewhat volatile still. However the selling pressure in the wake of the Fed gives the market more of a negative tone still as the European traders take over today. The outlook is still very uncertain as the consolidation around $1.3445/$1.3480 (which were long term breakout levels) continues. The reaction of today’s trading could be key as if the $1.3445/$1.3480 support band holds then the momentum which has been strong can settle again. The hourly chart reflects all this, showing the recent moves to be a consolidation as momentum is oscillating without a trend. Resistance initially at $1.3510 but then up at $1.3655 from yesterday’s high.

USD/JPY

The hawkish Fed has driven a continuation of the trending move that has formed in the past couple of weeks. A confirmed breakout above 111.00 came as the market completed another bullish candle and push above 112.20. This has now opened the way for a continued rally. The next resistance is 113.55 however there is little real resistance until 114.50 which was the July high. Momentum indicators are increasingly strong with the RSI rising into the mid-60s, the MACD lines accelerating higher and the Stochastics strong. Corrections remain a chance to buy and the old resistance at 111.00 has turned into new support, bolstered by yesterday’s low at 111.10. The hourly chart shows 111.85 is an initial basis of support.

Gold

Having broken the medium term uptrend, the market has been increasing the pressure on the key support at $1300. In the wake of a hawkish Fed and dollar strength, this support gave way yesterday. Another lower high formed at $1316 was left as the market formed another bearish engulfing candle and an intraday breach of $1300. Although the market did not close below $1300, there have been further declines early today which are again seeming to breach the key floor. A close below $1300 would be the final confirmation that the bears are back in control and open subsequent downside supports. The momentum indicators are increasingly corrective with the RSI falling into the low 40s, MACD lines accelerating lower and Stochastics bearishly configured. Next supports to watch are $1278 and $1274 with $1267 being a key higher low. The hourly chart shows how there is a band of overhead supply initially now between $1304/$1316 with the market selling into intraday strength now.

WTI Oil

With the EIA inventories similar to last week (crude stocks higher than expected, but the distillates and gasoline drawdowns were also more than expected), the market can retain its positive configuration and further pressure on the resistance at $50.50. Yesterday’s solid bullish candle shows the market is preparing for a decisive move higher. An initial breakout today has come on the rollover to the new front month contract but the bulls are still in a position to buy into intraday weakness. Positive configuration on momentum indicators reflects this with the RSI in the 60s, MACD lines rising above neutral and Stochastics retaining a bullish position. The consolidation of the past week means the near term support at $49.15/$.49.40 is building well now, alto above the old six month downtrend. Corrections are a chance to buy for a move towards $52.00 initially.

Dow Jones Industrial Average

The hawkish Fed has seemingly done little to hamper sentiment, if anything has actually helped to bolster an increasingly strong outlook. A close at the high of the day maintains the recent strong momentum. Corrections remain a chance to buy as the market remains on course for the push towards the range breakout target at 22,675. Momentum indicators suggest a strongly trending market is in flow now and there is precedent for the RSI to remain above 70 for several days or even weeks during a trending phase (which this certainly seems to be). Yesterday’s intraday low at 22,315 is initial support now with 22,179 key.