Will the dollar rally last beyond the Fed minutes?

Market Overview

The US dollar has been rebounding in recent sessions. The big question is whether this is a sustainable recovery, or just a case of short covering that is likely to flounder once more as the bigger macro trends begin to re-assert? The chances are that the latter is going to be the case as the market remains concerned over the increasing burden of the ballooning US twin deficit. Market fears over rising inflation are clear with the market increasingly pricing in three rate hikes by the Fed this year. The US 2 year yield spiked higher yesterday on a $28bn auction of 2 year notes, but the focus now will be on the Fed minutes tonight. Can the dollar rally last? Any hints of heightened concerns of the members over the implications of increasing inflation trends will impact on longer dated yields and could be seen again as an open door for volatility to return. Sentiment is more cautious today after Wall Street corrected back last night, but could the Fed minutes be a game changer tonight?

Wall Street closed lower with the S&P 500 -0.6% at 2716 whilst Asian markets mostly remain closed for the Lunar New Year but the Nikkei was +0.2% on reduced volumes. European markets are set to open marginally lower too. In forex, the recovery on the dollar continues, with a mild outperformance across the majors and the yen weakness being standout. In commodities the dollar strength is also weighing on gold which is $3 lower, whilst oil is around 1% weaker.

The early European session will be packed with the flash Eurozone PMIs which the regional data is at 0900GMT and is expected to show the Eurozone Flash Manufacturing PMI expected to dip to 59.2 (from 59.6), The Eurozone Flash Services PMI expected to dip slightly to 57.6 (from an upwardly revised 58.0) and the Eurozone Flash Composite PMI expected to be 58.5 (from 58.6). Focus for sterling traders will comes from the UK employment data at 0930GMT. The headline UK Unemployment is not expected to move from the 4.3% that it has been for the past four months, however the real moves will come from Average Weekly Earnings growth which is expected to remain at +2.4% ex-bonus however positive surprises will be strong for sterling. The US Existing Home Sales are at 1500GMT and are expected to improve to 5.60m (from 5.57m). The big focus for the US session though will come from the FOMC minutes for the January meeting. There was no rate hike this time around, but the outlook o the members over increasing signs of inflation and how this could impact monetary policy in the coming months will be key for yields and the dollar.

 

Chart of the Day – GBP/AUD 

Sterling trades will be in focus today as the markets focus on wages for both Australia and the UK. Technically there is a trend intact on Sterling/Aussie which continues to pull the market higher. The trend was creaking yesterday with an initial drop back, but the bulls reacted strongly to form a positive candle that has been followed by an upside breakout above last week’s high of 1.7807. Momentum indicators have been wavering in recent days but the bulls seem to be ready to grasp control again after a period of consolidation within the trend. A close above $1.7807 would suggest the bulls are ready to push on within the trend and re-open the key December/February highs of 1.7995. The hourly chart shows adecivive move above 1.7807 today would be a breakout from a 230 pip ranging configuration, and imply a test of the key highs. Initial support is 1.7680/1.7750 with key support at 1.7570.

 

EUR/USD

With the dollar again in recovery mode, we see EUR/USD being dragged backwards again. After Monday’s doji (due to President’s Day in the US) the direction resumed to the downside yesterday with another strongly negative candle. This follows the bearish engulfing candle of Friday which was also a false upside breakout. However, the way the momentum indicators are moving along with this corrective move, there is an increasing prospect that this could become a corrective phase of some substance. The momentum indicators all still hold medium term positive configurations but have lost impetus near term as the dollar has once more looked to rebound. The big support at $1.2205 is crucial to the whole move and needs to be watched as the market continues to drop away. The hourly chart reflects a corrective market posting lower highs and lower lows now and the next support of note is $1.2275 . On the bull side, there is resistance at $1.2365 and then at $1.2240 that needs to be cleared for the euro bulls to re-establish themselves.

 

GBP/USD

Cable is showing far less corrective momentum than EUR/USD currently. Although there is still a trend of near term corrective candles that have formed, the magnitude of the move lower is far less pronounced. The daily momentum indicators are fairly neutrally configured with the RSI and Stochastics around 50 and the MACD lines drifting above neutral. The market was supported around $1.3930 yesterday with the hourly chart also neutrally configured now. This is a market in need of a catalyst, which may come from the UK earnings growth this morning. A decisive move above initial resistance at $1.4025/50 opens the upside again towards $1.4150, with a loss of support at $1.3930 re-opening $1.3800 again.

 

USD/JPY

Dollar/Yen looks to be a classic set up for a chart to sell into strength. The current dollar rebound is coming from the bull hammer posted last Friday and the subsequent bull candles since. This is helping to unwind overstretched momentum indicators and should help to renew downside potential. The overhead supply of the key old supports at 107.30/108.30 comes with a confluence of resistance with a six week downtrend and the falling 21 day moving average (both around 108.40 today). So any failure of this rally is likely to drive a return of the sellers once more. The hourly chart shows resistance at 106.80 and 107.50.

 

Gold

Yesterday’s huge bear candle really does put a different complexion on this chart. Previously the bulls have been sitting quite happily, looking to use corrections as a  chance to buy. However the support at $1344 gave way yesterday and quickly the next key level at $1325 is being tested. This comes with the momentum indicators taking a deterioration as well, with a bear kiss on the MACD lines and cross lower on Stochastics. The RSI moving into the low 40s would also be a warning that the recent low at $1306.80 could be set to come under further pressure. For now this is still an unwinding move to be considered by the bulls, however, once more the market is testing lower again today, with the hourly chart showing lower highs and lower lows. A close below $1325 would add to the fears of continued correction.

 

WTI Oil

The recovery on oil in the past few sessions has allowed the bulls to regain some of the control. However, to truly resume control there would need to be a break back above the resistance at $62.85. It was therefore interesting to see the rebound failing yesterday under the resistance, at $62.75 to form a failure candle. A failure candle is now being followed up by early losses today. The momentum indicators have unwound back towards neutral, so the reaction of the market today could now be a crucial factor behind whether the recovery can continue. The hourly chart momentum indicators have rolled over and the importance of the support at $60.85 is growing. A breach would end a trend of higher lows and start to suggest the recovery was significantly waning.

 

Dow Jones Industrial Average

The recovery is beginning to wilt as the Dow has posted the first strong negative candle since the huge volatility driven sell off. After five consecutive positive sessions ended on Friday, the market has re-opened after the long weekend with more than -1% decline on the session. Momentum in the recovery is now being seriously questioned. The RSI has dropped back below 50, the MACD lines have stalled in their minimal recovery and the Stochastics are also waning. Yesterday’s high at 25,179 now becomes a key near term resistance as a lower high below Friday’s high of 25,432. Furthermore though, the support at 24,809 is also a key gauge for whether the bears can begin to gain traction.