Is the latest dollar run higher about to lose its way? The dollar has been seen as the best of a bad bunch as central banks are falling over themselves to turn increasingly dovish. However, rumbling along in the background, the trade talks between the US and China have always had the potential to derail the dollar bull run. Resolution of the dispute runs the risk of unwinding the gains that the dollar saw throughout much of 2018 as the tensions and tariffs ratcheted up. US economic advisor Larry Kudlow said yesterday “expect to make more headway” in the talks this week. It is interesting to see that the Dollar Index has this morning dropped away, even as Treasury yields have ticked higher again. The Dollar Index has also just broken a two week streak of posting higher daily lows. A boost to risk appetite has also come from the China Caixin Services PMI which were well ahead of expectations at 54.1 (52.3 exp, 51.1 last). Positive risk means equities are higher, and the safe haven Japanese yen is under pressure, whilst the dollar is also broadly underperforming this morning. The latest Brexit development sees UK Prime Minister May set for discussions with Opposition leader Corbyn over a way to remove the log jam. Markets are seeing this as a move towards a softer Brexit (Customs Union potentially), but cynics would say that is could just be a ploy to drag Labour into the mess that the Tories have got themselves in over Brexit. Only time will tell.
Wall Street closed flat to slightly lower (S&P 500 flat at 2867) but futures are gaining ground early today by +0.4%. Asian markets have responded positively, with the Nikkei +0.8% and Shanghai Composite +0.5%. European indices are also taking strength with the DAX futures +0.7% but FTSE futures lagging at +0.2%. Moves on forex majors, show a risk on vibe, with yen and Swissy underperformance amidst a broadly weaker dollar. The Aussie and Kiwi are responding to the Chinese data with outperformance. In commodities, gold is mixed, with silver a shade higher, whilst the breakout to multi-month highs on oil continues amidst reports that OPEC supplies are running at four year lows.
The services PMIs will be key to the economic calendar today. The Eurozone final Composite PMI is at 0900BST and is expected to drop back to 51.3 (from February’s 51.9). The UK Services PMI is at 0930BST and is expected to fall back to 50.9 (from 51.3 in February) and will be an interesting one to watch given the huge stock piling that drove the positive surprise in UK manufacturing PMI on Monday. The US ADP Employment change is at 1315BST and is expected to show 170,000 in March (a little lower from last month’s 184,000). The US ISM Non-Manufacturing is at 1500BST and is expected to drop back to 58.0 (from 59.7 in February) so still very strong. EIA inventories are at 1530BST and are expected to show a crude oil drawdown of -1.6m barrels (+2.8m build last week).
Chart of the Day – FTSE 100
Helped by a negative correlation with a weaker sterling we see FTSE 100 breaking out yesterday. The move is accelerating higher and has now put together an increasingly strong run of bull candles. A closing breakout above 7370 took FTSE to a 6 month high and continues the uptrend channel of the past three months. Momentum indicators are very strong but with further upside potential, with the RSI in the mid-60s. The MACD lines have only just bull crossed higher and the Stochastics are accelerating into strong configuration. This looks to be a run that has further legs in it. The next resistance is at 7550. The hourly chart shows momentum strength and any weakness should be seen as another chance to buy. The breakout at 7370 is supportive, whilst there is support in the band 7280/7300. The support at 7146 is also now a key higher low.
A rebound from a shade above the key $1.1175 low will have encouraged the euro bulls, but there is much more that needs to be seen if a sustainable recovery is to set in again. Closing 40 pips off the low (in the upper half of the daily range) and then pulling higher again early today is a good start though. This move is helping (at the moment) to drive the Stochastics to threaten a cross higher and the RSI to also level off. The key will be resistance in the $1.1250/$1.1260 range which capped the market recently (shown well on the hourly chart) and would signal the market beginning to make good near term recovery progress. The hourly chart is showing hints of improvement too, with the hourly RSI above 60 and MACD lines above neutral. If these gain traction in their improvements then there would be some cause for sustainable recovery. Is this a glimmer of hope for the euro bulls?
Once more the sterling bulls have defended $1.3000 successfully. A rebound into the close (again on Brexit related newsflow) has helped to maintain support at $1.3000 and formed a second consecutive bull candle. Keeping an eye on Brexit developments seems to be the best way to play Cable right now, but it is interesting to see on the hourly chart the market again rallying towards $1.3150 initial resistance. This is a level the bulls will be eyeing this morning, an old pivot that is preventing a move towards $1.3200 again. There is a complete lack of trend on Cable right now, so this makes positioning for longer than a day or so very difficult, due to consistent sharp retracements.
A recovery on Dollar/Yen over the past week is just beginning to stall a touch as the resistance from the early March consolidation just starts to play a role again. There has been an improvement in momentum indicators in recent sessions, with the Stochastics and RSI rising above their neutral positions. However, a failure to breakout above 111.90/112.10 resistance would simply suggest this is an unwind into congestion again, rather than a more considerable rally. MACD lines are now flattening at neutral, so effectively these indicators need more to suggest the bulls are in control. There is still a mild positive bias on the hourly indicators and a run of higher lows. Initial support around 111.20 whilst 110.80 is the first real higher low support.
A hint at the formation of support will be encouraging the bulls, but more needs to be done to prevent the continued pressure on the key support band $1276/$1280. Momentum indicators have calmed down to a certain extent, with the RSI hovering around 40 and the MACD lines just threatening to flatten off again. A rebound this morning also means that a run of six consecutive closes of lower daily highs has been halted. The key remains the resistance that is ever growing under the old long term pivot at $1300 and this needs to be breached for sustainable recovery to set in. The hourly chart shows hints of recovery as the hourly RSI is looking to build above 60 and the hourly MACD lines are straining to hold above neutral. Initial support is around $1285. The risk remains that a breach of $1276 would confirm a multi-month head and shoulders top and cause significant damage to the longer term bull arguments.
Oil is on a run higher and the market is posting consistent bull candles now. Running well clear of the 50% Fib levels opens 61.8% Fibonacci of $76.90/$42.35 at $63.70 and the next key resistance at $63.60. Momentum is strong and positively configured to suggest intraday weakness is to be seen as a chance to buy. The RSI is confirming the breakout with a move above 70 which is the highest level since the big sell-off kicked in back in October. Perhaps this could limit immediate upside potential, but corrections remain a chance to buy. The hourly chart shows initial support in the band $61.65/$62.00. It is worth watching the 21 hour moving average which has tracked the run higher for the past three sessions. A breach could hint at a potential loss of momentum and a corrective move setting in. This would then be another chance to buy.
Dow Jones Industrial Average
The strong run higher started to just consolidate a touch yesterday as the bulls just took a pause for breath. A very mildly corrective candle was formed, but on a session of just 98 ticks range and which was also an “inside day”, this was a day more of reflection than any trend changer. Momentum indicators retain their positive configuration with the Stochastics still strengthening, RSI above 60 and MACD lines now bull crossing. Decisively clearing the resistance at 26,240 of the November high remains a key near term task for the bulls, and a close above Monday’s high at 26,280 would certainly help. Effectively the market is holding in a support band 26,110/26,240 now and the momentum should ensure further gains in due course. Clear 26,240 opens the all time high at 26,952.