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Dollar rally is stalling as Treasury yields consolidate

Market Overview

The dollar rally seems to be slowing in the past couple of days as the huge move higher in Treasury yields has just started to consolidate. This means that there could be a short period of respite at least, for the selling pressure on major forex currencies and gold. The Trade Weighted Dollar Index closed above 100 for the first time since December last year yesterday but the market is beginning to consolidate. This comes as the 2 year Treasury yield is settling down around 1.0% and the 10 year yield is settling around 2.2%. This settling is allowing support to form on the likes of gold (above $1211) and the euro (above the key support around $1.0710). It is possible that the profit-takers may look to move in if this consolidation continue. However, until there is more meat to the bones of what Trump’s proposals are, it is likely that the market will back this reflation trade that is supportive for the dollar. This comes as FOMC members continue to roll out with more hawkish language in the wake of the prospect of fiscal stimulus from President-elect Trump. Eric Rosengren suggests this would generate a tighter monetary policy with Daniel Tarullo said yesterday that a hike was more likely now.
Equity markets have started to move higher again after a minor bout of consolidation. The S&P 500 has pushed back towards its range highs again with 0.8% gains and a close of 2180. Asian markets were also higher with the Nikkei +1.1%, whilst European indices are also looking solidly positive in early moves. Can the DAX sustain a move above 10,800 this time? In forex there is a mixed outlook for the dollar which is underperforming against support for sterling and the Swiss franc, whilst the Aussie is weaker after a miss on Australian wage growth. Gold and silver have continued to build on yesterday’s support, whilst oil is also holding on to yesterday’s gains.
Traders will be looking at sterling once more this morning with the announcement of UK unemployment at 0930GMT. The headline figure is not expected to move from the 4.9% with a 2,000 increase in claimant count. However the more interesting impact will be seen from the average weekly wages growth which is expected to pick up to +2.4% on an ex-bonus year on year basis. Considering the dip in UK inflation yesterday this will be a key number. The US PPI at 1330GMT is expected to pick up strongly and could be a hint at further inflation increases further down the line, with PPI headline YoY expected to increase to +1.2% (from +0.7%) and the core to +1.5% (from +1.2%). US Industrial Production at 1415GMT is expected to show a +0.2% growth on the month, with capacity utilization expected to improve slightly to 75.5 (from 75.4). The NAHB Housing Market Index at 1500GMT is expected to stick at 63. The EIA oil inventories at 1530GMT have been creating sizeable volatility in recent weeks and the crude stocks are expected to show a build of +1.5m barrels, with distillates giving a drawdown of -2.0m barrels and gasoline stocks a build of 0.5m barrels.

Chart of the Day – GBP/AUD

Has the recovery already been nipped in the bud? The near term breakout above 1.6380 formed a small base pattern that implied an upside recovery target of 480 pips towards 1.6860. However it was very interesting to see the recovery this week flounder around the key overhead supply of the old key August low at 1.6715, posting a high at 1.6750. Two subsequent negative candles are a concern, but interestingly yesterday’s low was at 1.6400 and pretty much a pullback to the neckline. Furthermore, this support has been affirmed by a positive reaction early today. However, this now leaves the recovery at a bit of a crossroads for the near to medium term outlook and today’s move could be key. The momentum indicators are mixed with the RSI above 50, the MACD lines having turned back to neutral but the Stochastics are threatening to turn lower again. A drop on the RSI below 50 would be a negative sign, as would a failure of the neckline support at 1.6380. The hourly chart shows a neutral outlook forming on the momentum indicators and the importance of the support at 1.6400. This zone between 1.6400 and 1.6750 could become key now as the market looks for the next signal.

Read the full article and see the charts on Hantec Markets website.

Wednesday, 16 Nov, 2016 / 8:48

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