Is the dollar about to put in one final leg higher for 2018? The past few weeks has been very choppy for the dollar as a whole raft of uncertainty regarding the US/China trade dispute, the Italian budget (and possibly now the French budget too) and Brexit have left traders scratching their heads. The latest newsflow in the US/China trade dispute has been positive, with the signal that China is ready to drop its tariffs on imports cars from the US to 15% from 40%. Although actions speak louder than words, this move from China is a positive sign in the dispute, helping risk appetite today with equities positive and US Treasury yields having pulled higher. Coming at such a time of turmoil for sterling (Brexit related, obviously) and the euro (budget concerns still), the dollar is finding this move in yields supportive. There is plenty of time for further events to scupper this move, but with the Fed officials in blackout period (for next Wednesday’s FOMC), there is scope for a dollar move into next week. In the UK, Brexit related politics are febrile and the position of the embattled Prime Minister Theresa May is looking ever more under threat. With the threshold of 15% of Conservative MPs (which is a total of at least 48) asking for Mrs May to step down has been reached. She will now face a vote of confidence in her leadership tonight between 1800GMT and 2000GMT and needs half of the votes (over 158 MPs) to hold on. Expect further sterling volatility today.
Having seen significant gains earlier in the session, Wall Street closed very disappointingly marginally lower yesterday with the S&P 500 -1 tick at 2637, although futures are looking more positive around half a percent higher. Asian markets have taken this improvement in sentiment well, with broad gains (Nikkei +2.2%, Shanghai Composite +0.3%). European markets are also showing gains today with futures on FTSE 100 and DAX both around half a percent higher. On forex markets, there is a risk positive look to the G4 majors, with the yen weaker, whilst the euro and even sterling ticking higher. In commodities, the risk positive and dollar gains are limiting gold today, whilst oil is hanging on to yesterday’s rebound.
US inflation is the focus on the economic calendar today, but first up in the morning, Eurozone Industrial Production is at 1000GMT with the market expecting monthly growth of +0.2% in October (compared to -0.3%) which would see the year on year growth slip to +0.7% (+0.9% in September). US CPI for November is at 1330GMT and is expected to see the headline CPI dropping to +2.2% (from +2.5%) with the core CPI expected to tick a shade higher to +2.2% (from +2.1% in October). EIA Crude Oil Inventories are at 1530GMT are expected to show weekly crude stocks again in drawdown (for a second week) with -3.2m barrels (-7.3m barrels last week). Distillates are expected to build by +2.0m barrels (+3.8m last week) with gasoline stocks expected to also build by +2.8m (+1.7m last week).
Chart of the Day – FTSE 100
Risk appetite has been terrible for European equities in recent weeks. Whilst the DAX has certainly borne the brunt of this, the FTSE 100 has also been pressured (although not so much due to the negative correlation with the weakening sterling). FTSE 100 made a key breakdown last week on the decisive move below 6851, to take the market to a new two year low. However, it was interesting to see that the market has subsequently found support around the next key low (from December 2016) at 6674. Although the moves since have been to consolidate the 6774 support, there has been no sign of a sustainable recovery. After yesterday’s positive candle, how the bulls respond today will be key as there is a band of overhead supply 6851/6904 from trading over the past eight weeks that is yet to be breached. The outlook on the momentum indicators looks like this could be the latest technical rally as the RSI unwinds from 30 and Stochastics cross higher. This should help to renew downside potential as 50 is now limiting the RSI and once this move fizzles out it is likely to provide the next chance to sell. Any lower high under the key resistance at 7220 is likely to be pounced upon.
A second very disappointing candlestick in a row has put the support at $1.1300 under pressure once more. This was the second session where the euro bulls had good initial control, only to lose their grip into the close. The old key floor at $1.1300 acted as a basis of support for a higher low (above $1.1265) in the past two weeks and needs to hold again. A failure of $1.1300 on a closing basis would seriously question the recovery outlook on EUR/USD. The momentum indicators which have been fluctuating in recent weeks retain their neutral near to medium term configuration, but having looked to build a base of support above $1.1265, there is a real danger that this could be scuppered now. The hourly chart shows a negative bias is forming near term, whilst the resistance at $1.1400 seems to be growing.
The outlook for Cable has deteriorated markedly in the past couple of sessions. Monday’s decisive break below the old medium term range floor at $1.2660 has taken the outlook into a new phase of negativity. An intraday rebound failed at $1.2640 yesterday only to end the session closing a further 75 pips down on the day. Below $1.2585 has opened $1.2350 as the next basis of support. Momentum remains very bearish and it is difficult to see past intraday rallies being continually sold into now. Near to medium term political risk is high for sterling and traders do not like uncertainty. There is a resistance band $1.2585/$1.2660 now. Anything around 50/60 on the hourly RSI is seen as a chance to sell now. Expect further downside in due course.
It looked as though the dollar rebound was going to once more slip back yesterday, but the bulls steadily reclaimed lost ground through the session and closed back near to the day highs again. This reaction will be seen as dollar positive near term but taking a step back is essentially just playing out as part of what is increasingly a consolidation triangle. The converging trendlines of the past nine weeks reflect this, whist medium term configuration on the RSI and MACD lines are increasingly neutral. The Stochastics have ticked higher again to reflect the near term improvement and the old pivot at 112.90 is seen as a gauge of support initially now. Resistance at 113.85/114.00 is key for a continuation of this consolidation, whilst it is interesting to see the nine week downtrend at 113.85 today. Yesterday’s low at 113.00 is initial support.
Gold has been tracking higher within a mini uptrend channel of the past two weeks. However, a slip back in the past couple of sessions means that the support of the mini channel (around $1240 today) is now being tested. Despite this, the configuration on gold remains strong and near term corrections remain a chance to buy. Momentum is broadly strong, whilst even if the mini channel support were to be breached, there is good medium term support in the breakout band between $1230/$1243. Any renewed buy signal within this range will be seen as an opportunity. The bulls will though be aware that resistance is building around $1250, a level that has restricted them in each of the past three sessions. One caveat is with the Stochastics which are threatening to roll over, although this could still just be taken as helping to renew upside potential on a medium term basis.
After failing for much of the past week around the resistance of the now nine week downtrend, a positive session yesterday is now looking to be built upon to break the trend. The question is, can the bulls confirm the break this time? Closing decisively higher today would be an important step. Every time the bulls have looked to get a start in the past couple of weeks, they have not been able to hold the move into the close. There is resistance in the band overhead at $52.75/$54.75 which is the main barrier but a close above the downtrend (today at $51.70) would be a good start. Momentum indicators are all beginning to look more of a recovery play too with the RSI rising at six week highs, whilst the MACD and Stochastics are also more positive. There is support building in the band $50.00/$50.50 now too. A close above $54.75 would be bullish for a recovery.
Dow Jones Industrial Average
The concern with backing Monday’s bull hammer candlestick comes with the elevated volatility. This is reflected in the continued extended Average True Range (now rising over 500 ticks again) and the wild intraday swings. This is shown well with the intraday moves once more yesterday, where initial bullishness was sold into. Reading the daily signals on the Dow is a minefield at the moment, but on a medium term basis, there seems to be support again as the Dow reaches 24,000 area (Monday’s low at 23,881) Much beyond that, momentum is difficult to ascertain, although the negative drift would still suggest selling into strength is preferred (yesterday’s session shows this). Resistance is now with yesterday’s high of 24,791 whilst the support at 24,220 is initially in place.