Market Overview
The recovery in the dollar has stalled as markets look towards Janet Yellen’s key testimony to Congress over the next couple of days. Treasury yields have just paused in their recovery and the Dollar Index has just shied back away from its late January reaction high resistance of 101.00.
This equates to some key levels on major markets with dollar/yen failing around 114.00 resistance, and key supports of $1.0575 on EUR/USD and $1220 on gold also remaining intact. The market is waiting to see how Yellen approaches the Congressional grilling, although she tends to play the questions fairly straight, and giving little away. However, key factors include Yellen’s outlook for growth (which could drive a tighter Fed) and the impact of fiscal expansion on monetary policy. Although the Fed has three rate hikes in the dot plots this year, the market is currently pricing just two, so any hawkish hints could drive Treasury yields and the dollar higher.
Inflation is also a theme of today as China and the UK announce. The trend around the world for upside surprises on inflation continued overnight with Chinese inflation which jumped ahead of expectation. China CPI improved to its highest since May 2014 at +2.5% and ahead of the +2.4% expected (up from +2.1% last month). This inflation increase was added to by the more volatile PPI which at +6.9% also came ahead of the +6.3% forecast (+5.5% las month). This is further data that reflects the stabilisation of the China slowdown. The UK is also expected to be another country that shows rising inflation and this will be key coming ahead of the wage growth data which is announced tomorrow and is likely to reflect pressure on real wages.
Wall Street closed at all-time highs again with the S&P 500 up +0.5% at 2328, whilst Asian markets mixed to lower (Nikkei -1.1%), whilst European markets are slightly mixed to lower in early moves. Forex markets show the dollar mildly lower, whilst metals are supported and oil is all but flat.
There are several data points for traders to watch in the European session today, starting with the UK inflation, with UK CPI announced at 0930GMT. An uptick is expected on both the headline data to +1.9% (from +1.6% last month) which is close to the Bank of England’s target of 2% which looks certain to be overshot in the coming months, whilst core CPI is expected to pick up to +1.7% (from +1.6% last month). The second reading of Q4 2016 Eurozone GDP (flash reading) is expected to 1000GMT which is expected to drop slightly to +0.4% (from a final reading of +0.5% last month). German ZEW Economic Sentiment is at 1000GMT is expected to drop slightly to 15.00 (from 16.6). US PPI is at 1330GMT which is expected to drop to +1.5% for the year (down from +1.6% last month).
Chart of the Day – EUR/GBP
Technically, having consolidated for a few weeks, euro/sterling is beginning to deteriorate again. With the euro under pressure from the build-up of political risk (French election, Greek debt), in addition to support for a ranging sterling, this is pulling EUR/GBP lower. The outlook is now becoming increasingly corrective as the late January low at £0.8467 has been broken by the posting of a fifth consecutive bear candle which closed below the support. This breach of £0.8467 on a closing basis is a key breakdown, however a move below £0.8445 would complete a head and shoulders top pattern that would certainly imply a test of the key medium to longer term support around £0.8300. Adding to the conviction of the technical deterioration and downside target area, a closing breach of £0.8467 has also completed a near term trading range breakdown which implies a 200 pip downside target. Watch for the RSI dropping into the 30s as a potential trigger signal for the break. The hourly chart has been drifting away for the past week under key near term resistance that has formed at £0.8550, with an initial resistance band £0.8490/£0.8525.
EUR/USD
The dollar is so close to making key breaks on several forex major pairs, but cannot quite make the move. The pressure on $1.0577 key support continued yesterday, as the market fell by another 40 pips to close at the low of the session. The momentum indicators remain corrective and the recent slide has formed a near term downtrend. Something will have to give today as the support is so close, but the trend lower is converging quickly. The initial reaction today has been positive but looking on the hourly chart suggests that rallies continue to be sold into. There is a sequence of lower highs and resistance forming around old key lows. The resistance band $1.0640/$1.0665 is now key near term. A breach of $1.0577 would re-open the key lows again around $1.03/$1.04.
There is still a lack of real direction on Cable as another unwinding candle formed yesterday. A mild pick up in sterling has pulled the pair back higher from the old pivot at $1.2430 again which retains a very marginal positive bias within the medium term range. The momentum indicators are neutrally configured and suggesting little real movement either. The hourly chart shows a drift higher that is pulling towards a test of the resistance at $1.2580 and the pivot at $1.2600. For now though the technical signals suggest playing Cable as a trading range between $1.2430/$1.2600, so the RSI towards the mid-60s is beginning to look stretched again. Near term support is at $1.2470.
Dollar/Yen is straining to make a key move to the upside that would suggest the bulls are in control but the decisive move has just not been seen yet. The chart has been improving but the bulls will be disappointed by the reaction lower into the close last night whilst the early move today has also been slightly lower. The momentum indicators have picked up but still as yet may only be unwinding the bearish position. There needs to be a key near term break and that is still being illusive. On the hourly chart, the old pivot at 114.00 continues to be a barrier to gains, with two intraday moves yesterday that failed to decisively break through the resistance. The momentum has subsequently been lost in the move, and if the hourly RSI starts to move below 30, then it could suggest that the bulls have lost control. The run of higher daily lows has been broken today and the initial support at 112.85 becomes an important level now.
Gold
In a very similar manner to Dollar/Yen not being able to decisively breach 114.00, the support at $1220 on gold again held firm and a further bounce today has maintained the key near term breakout. The broken uptrend has though been confirmed and this could become an increasingly choppy chart now, having posted resistance at $1244. However, the momentum indicators are still all fairly positively configured with the RSI above 60, and MACD lines positively configured. Furthermore, the hourly chart shows the momentum configuration is near term neutrally configured and the bulls are still hanging on. The initial resistance at $1237 will be key as this is currently a lower high and if it remains intact then the pressure on $1220 will continue to grow. Just like Dollar/Yen this is a chart that could now go either way.
WTI Oil
Oil continues to play as a trading range. Despite the three strong candles that closed so positively on Friday, the bulls once more hit a stumbling block yesterday with a corrective move that has put paid to a rally in the resistance that is so prominent around $54.00. This reflects the continuation of the trading range that has formed over the past two months between $49.75/$55.25. Momentum indicators are increasingly neutral and suggest that continuing to play the range is the only viable strategy for now. The bearish candle from yesterday that took that market back below the initial support of Friday’s low at $52.90 increases the downside pressure and brings the mid-range pivot at $52.00 back into play, with minor support at $52.20. Momentum has swung lower again and the hourly chart now shows a minor lower high at $53.75 under the $54.15 Friday resistance high.
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