US dollar at a crossroads with inflation concerns still key

Market Overview

The outlook for the dollar has taken a hit over the past 24 hours and now seems to be at a near term crossroads and inflation could be the driver. The main catalyst has been a weaker than expected reading of US ore CPI inflation which dipped back to 1.7% and suggests that sluggish inflation will continue to be a theme moving into 2018. Fast forward then to the FOMC decision to hike the interest rate by 25 basis points last night. The move was widely expected and also even included upgrades to growth expectation. However there were a couple of dissenting voters (Evans and Kashkari) but coming in conjunction with no increases to the inflation expectations, this suggests that the Fed remains wary. Although not specified, the growth enhancement coming without inflation expectations being revised higher reflects continued concern of an inability to move the needle despite the strong labor market. The US 10 year yield which had been above 2.40% dropped back to 2.35%, whilst the US 2 year yield fell back over 5 basis points on the day. The market could now question whether the Fed can tighten as the pace it is doing, and certainly not quicker. The dollar index has been hit too. This morning there is a degree of settling down and traders seem to be at a bit of a crossroads now. It will be interesting to see the reaction of the market as to whether this is seen as a minor blip in the dollar strength or something that becomes a problem for the dollar bulls. As ever the reaction on the bond yields will be telling.

Wall Street closed off its highs of the day as the run higher wilted after the Fed decision. The S&P 500 was down by almost -0.1% at 2663, with Asian markets also cautiously lower (Nikkei -0.3%). European market are also now under pressure early today. In forex, there is a degree of settling down for the dollar after yesterday’s strong decline, but there is little overall direction forming yet. The Aussie is an outperformer after better than expected employment data. The commodities show mixed moves with gold consolidating yesterday’s rebound and oil ticking mildly higher.

It is a massive day of central bank announcements with the SNB, BoE and ECB all updating on monetary policy but also retail sales for the UK and US. First up is the Swiss National Bank at 0830GMT with no move expected from the current deposit rate to -0.75%. The Bank of England is at 1200GMT and having hiked rates by 25 basis points in November, the MPC is not expected to change rates from the current +0.50%. The minutes will also be released and are expected to show a 9-0 vote in favour of standing pat. The European Central Bank is at 1245GMT and again is not expected to move on rates (with the main refi rate at 0.00% and the deposit rate at 0.40%) or further changes to asset purchases after having been cut to €30bn per month in the last meeting. The press conference from Mario Draghi at 1330GMT can often be interesting for euro traders though. Aside from central banks it is also a day of flash PMIs, with the Eurozone flash Manufacturing PMI at 0900GMT which is expected to slip slightly to 59.8 (from a very strong 60.1 last month), whilst the Eurozone flash Services PMI is also expected to dip slightly to 56.0 (from 56.2). UK Retail Sales are at 0930GMT and are expected to show ex-fuel sales recovering to +0.4% YoY (from -0.3% last month). The US Retail Sales are at 1330GMT which are expected to show ex-autos rising by +0.6% MoM (up from +0.1% last month).

Chart of the Day – AUD/USD 

There has been a significant improvement in the outlook for AUD/USD in the past few days. The question is whether this is a sustainable rebound, or is it another chance to sell. The acceleration higher and the strong bull candle posted yesterday pulled the market into the resistance band $0.7620/$0.7655, but the early move higher today has now cleared this resistance. Helped by stronger than expected Australian employment data, the next move is whether the bulls can close today’s session above the resistance. It is interesting to see the MACD lines posting a bull kiss higher and the RSI also breaking a five month downtrend. The hourly chart shows strong configuration on momentum indicators with the hourly RSI supported above 45, the MACD lines above neutral. There is a near term pivot range $0.7620/$0.7655 which is now supportive. Reaction to this pivot could now be key for the outlook in the coming days. A failure under $0.7600 support would question the sustainability of the recovery. A close above $0.7655 opens the next key pivot at $0.7730.

EUR/USD

The near term outlook for the dollar has flipped once again after weaker than expected core CPI and the Fed resulted in a strong bullish one day candle formation. This has taken EUR/USD to a one week high and turned what had developed as a near term corrective move. This has now left strengthening support around $1.1715 and lightened the outlook. Momentum indicators have ticked higher, with the upturn in the Stochastics and RSI above 50 both neutralising chart factors. The reaction of traders and formation of today’s candle will be very important now as if another positive candle can form then with the market trading above the moving averages this would be a near term positive statement. Holding above a pivot around $1.1815 will also be key. The hourly chart shows the rebound has just wilted as we move into the European session and the pivot could now be tested.

GBP/USD

The formation of a strong bull candle yesterday with an open almost bang on the low and a close almost bang on the high over 100 pips higher on the day has significantly improved what looked to be a deteriorating outlook. Despite breaking a four week uptrend a breaching support at $1.3335 the rebound has now left support at $1.3300 and looks to be looking to build higher again. The momentum indicators have ticked higher to reflect this. Today’s reaction could be key though as if the bulls can put together a string of positive sessions then the sustainability of the support around $1.3300 will grow. As for now though this just adds to the run of somewhat medium term mixed signals and on the hurly chart the market has started to stall around $1.3450. An old near term pivot around $1.3400 is supportive now and this will be a near term gauge of intent today. Can the bulls hang on to the recovery and build a move above $1.3450?

USD/JPY

The significant dent to the confidence of the dollar bulls is reflected in the breach of not only the breakout support at 113.00 but also the two week uptrend. The strong bearish candle formation cut over 100 pips off Dollar/Yen and was the biggest drop in three weeks. The move has hit the improvement in the momentum indicators too, as the Stochastics have crossed lower. The question is whether this move will now be confirmed by a second successive negative candle. The initial reaction moving into the European session has been to build minor support around yesterday’s low at 112.45. However there is now a key near term resistance overhead with the pivot around 113.00/113.10 which is now acting as resistance. A failed rally under here would increase the pressure to the downside. The key support that would turn the market negative again within the medium term trading range is at 112.00. Again we are back into a neutral outlook on Dollar/Yen now.

Gold

The trend lower on gold has been broken as the market has rebounded strongly from the low at $1236. With yesterday’s strong positive candle, a two week downtrend has been breached and the momentum indicators are now beginning to turn higher. The question is how sustainable this recovery turns out to be. The reaction in the next couple of sessions could tell a lot, as the old support at $1260 is now a basis of resistance. If the market begins to fail around this resistance area, then the outlook will remain one to sell into strength, and the rebound will be another chance to sell. The hourly chart shows a near term improvement and an initial basis of support around $1252/$1253 now. If this can hold then the recovery can continue to build. However it is difficult to see gold recovering in a serious way with a clutch of overhead supply between $1260/$1275.

WTI Oil

The EIA inventories showed gasoline stocks again higher than expected and the market again has reacted negatively. This means a second strong negative candle has been posted and the market is turning into reverse once more. The underside of the old uptrend has been resistance and the deteriorating momentum indicators are beginning to drag on oil once more. The concern is that Tuesday’s high at $58.55 could be another lower high. On the hourly chart there is a near term head and shoulders top formation completed below $56.85 which implies $1.70 of downside now in the coming days. The resistance of yesterday’s high at $57.85 is now key for the coming days with a near term band $56.85/$57.00 an initial sell zone. This comes with negative configuration on the hourly MACD and RSI indicators which suggests that intraday rallies are now becoming a chance to sell. A test of the key low at $55.85 is now likely to be seen.

Dow Jones Industrial Average

Another positive close with the market pushing new all-time highs on the Dow. This is increasingly becoming a similar looking market to the one that pushed higher consistently throughout October. The market continues to show strong configuration on momentum indicators with the RSI climbing back towards 80, the MACD lines pulling higher and Stochastics rising. Intraday weakness is a chance to buy and this means that yesterday’s minor slip into the close could now be an opportunity. The old breakout at 24,534 is now a basis of support with a minor intraday reaction low at 24,505 adding further support. Yesterday’s high at 24,666 is initial resistance but with the market breaking higher in each of the past four sessions.