The US dollar is suffering as markets look towards the two key factors that are likely to weigh on the greenback in due course, China trade talks and a more dovish Fed. The US/China trade talks are progressing and there have been further signals from Donald Trump that the 1st March deadline for an agreement is not set in stone, or in his words ”not magical”. One of the stipulations that is emerging from the talks is that the US is wanting to discuss the weakness of the yuan. It is interesting to see the yuan strengthening in the past 24 hours and this is also adding to the pressure on the dollar. Furthermore, Treasury yields are falling ahead of the Fed minutes tonight which will put more meat on the bones for why the FOMC is shifting to a less hawkish stance on rates and a more manual approach to its balance sheet unwind. There was a sharp move lower on the Dollar Index yesterday and suggests that there has been a shift in sentiment, where intraday dollar rallies are now seen as a chance to sell. As if this has not been enough, there has been a change of sentiment on sterling, which rallied on very little concrete news, but Brexit speculation will certainly have the power to move such a nervous currency in the coming weeks.
Wall Street edged tentatively higher into the close, with the S&P 500 +0.1% at 2780, whilst US futures are around the flat line this morning. In Asia this equated to a mildly positive session (Nikkei +0.6%, Shanghai Composite +0.2%) whilst European markets are a shade higher this morning (FTSE futures +0.2%, DAX futures +0.4%). In forex, there is a mixed look to trading on the major currencies, with the yen underperforming again, whilst sterling is just giving back some of its sharp gains from yesterday. In commodities, there is also a consolidation on gold after strong gains yesterday, whilst oil is also holding ground.
It is a quiet European morning on the economic calendar. The only real data point of note comes with the Eurozone Consumer Confidence for February at 1500GMT which is expected to improve just the slightest amount to -7.8 (from -7.9 in January) having deteriorated for eight of the past nine months. The main event will undoubtedly be the FOMC minutes for the January meeting at 1900GMT. The extent of the dovish shift from the Fed took the market a bit by surprise and there will be an interest in the balance on the committee behind the move.
Chart of the Day – GBP/JPY
After several weeks of doing very little, finally signs of life in Sterling/Yen. However, is a breakout coming? A drift sideways with nothing really decisive to go on for the candles for three weeks, but now three firm bull candles in a row have suddenly shaken the market from a slumber. A resistance at 144.85 from the January high is the key barrier but has been breached intraday this morning. There has been a marked shift in momentum in recent sessions with the RSI picking up into the 60s for three week highs, whilst the Stochastics have given a strong buy signal and MACD lines are also turning up above neutral. A closing breakout above 144.85 completes a falling wedge breakout to open the November high of 145.85 but the 149.50/149.70 resistance would be the key target. The hourly chart shows initial support in the band 143.00/143.30 for buying into weakness.
After a period of choppy consolidation, there is now a new recovery trend which is trying to emerge. The market had been struggling to overcome the resistance of last week’s highs at $1.1345 but this was breached intraday yesterday and again this morning. There just needs to be a confirming close above $1.1345 to break the shackles. The bulls are on the brink of developing in this recovery, but just need to push on now. This is reflected in the momentum indicators which are gradually ticking higher, but not confirmed yet. The Stochastics are leading the way but the RSI needs a move above 50, whilst a bull cross on MACD lines would also be important. Given the intraday rebound yesterday which formed a bullish outside day session, and bullish engulfing candle, it shows that there is an appetite to buy weakness developing. The market has not traded clear above $1.1300 for seven sessions, so this would be a positive development. The hourly chart shows a band of near term breakout support between $1.1310/$1.1335. A move above $1.1360 opens the mid-range pivot at $1.1420 again.
A huge bull candle has completely shifted the outlook on Cable once more. Adding 140 pips on the session, there has been a sharp rally through all of the mid-range pivots (being $1.2920 and $1.3000) to test the next pivot at $1.3050. The move is accompanied by strong improvements in momentum signals, with the Stochastics accelerating higher RSI decisively above 50 and a MACD bull cross threatening. A consistent move above $1.3050 would open the January highs of $1.3215 once more. The bulls will be happy to hold above $1.3000 which is psychological. This is certainly a market reflection of a mood towards a softer Brexit, however, also therein lies the issue. Politics has made this move, but can also break it. Trading sterling does not get any easier.
The corrective move from late last week has now been contained and it seems as though the bulls are ready to continue their recovery once more. There have been three very mild yet positive candles in the past three completed sessions, to help build support above the increasingly importance pivot at 110.00 (the recent low was 110.25) and now a retest of the rebound high at 111.12 is on again. There is an increasingly positive formation to the momentum indicators, with the MACD lines tracking above neutral now, RSI picking up again above 60 and Stochastics maintaining their position above 80. This all points towards further upside and intraday weakness being bought into, albeit the moves seem to be slow and steady. The market is seemingly on course for a test of the key pivot to the upside at 111.35 which is the next big resistance.
The bulls have really found traction now as the market has broken decisively through the $1326 resistance on a strong positive candle. This completes four bull candles in a row and means that momentum indicators are strongly configured. The implied upside target is initially $1350 ($24 range breakout from $1326). This is a target that has almost been hit already this morning with $1346 intraday high. Intraday weakness is a chance to buy, with strong positive configuration on momentum as the Stochastics track decisively higher, RSI above 70 (positive still in a trending move) and MACD lies crossing higher. The breakout above $1326 is now a good basis of support, whilst the hourly hart shows minor support initially at $1338 this morning. The next real resistance does not come in until $1355, with $1366 being the big 2018 high.
WTI confirmed the move above $55.75 resistance on a closing basis yesterday. This now opens the way for a move towards a test of the medium to longer term pivot at $58.00 which is the next key resistance. Furthermore, an entire trading session clear of the 38.2% Fibonacci retracement (at $55.55) opens the 50% Fib at $59.60. Given the strength of the momentum indicators confirming the breakout (RSI at 4 month highs, Stochastics tracking strongly into bull configuration) this means that weakness is a chance to buy. There may be a slight sense that the hourly chart is just consolidating the breakout and this could mean a bit of a slip on an intraday basis. However the hourly chart shows a basis of support around $55.00/$55.30 with a near term higher low support at $53.10. Any retreat that finds support will be considered another opportunity for joining the rally.
Dow Jones Industrial Average
The market continues to make ground higher as the recovery progresses. Within this, consolidations and intraday weakness will be seen to be a chance to buy. The market is now trading clear of the 76.4% Fibonacci retracement at 25,715 but this now becomes the first line of support. The recent breakout at 25,625 is also an area of interest for the bulls too. The hourly chart shows a minor slip into the close which has just pulled over the hourly momentum indicators and means that opportunities to buy could present themselves once more today. Anything between 25,625/25,715 would be such an opportunity. As long as the support at 25,309 remains intact there is little for the bulls to be overly concerned about right now. A move above the December high at 25,980 opens the November peak of 26,278.