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Euro to consolidate with uncertainty ahead of the ECB

Market Overview

The dollar managed to unwind some of its losses yesterday as strong factory orders helped to drive a recovery. However, over the past weeks the corrective outlook for the dollar has been building and it will be interesting to see if this is anything more than a rally within the corrective pressure. The trade weighted dollar index completed a top below 100.65 and the move has merely unwound back to that neckline which is now an area of resistance. The yields on US Treasuries have been consolidating and are now longer advancing for now as the market is clearly pondering just how far the dollar has come in such a short space of time. The euro gave back some of the ground that it made following the Italian referendum, however it is beginning to consolidate today as traders look towards the uncertainty of the ECB monetary policy meeting on Thursday. This is a meeting where we expect the ECB to extend the easing program by at least 6 months, but could also begin to signal a potential tapering of these asset purchases too, and so volatility is likely to be elevated.

Wall Street closed higher again last night with the S&P 500 +0.3% at 2212, whilst Asian markets were broadly higher (Nikkei +0.7%). European markets rallied into the close last night and are showing good gains today. It will be interesting to see if the DAX can finally break the shackles of the resistance band 10,800/10,827 that has held it back for the past four months. In forex markets the dollar has remained positive with sterling and the yen both weaker, however it is interesting to see the euro consolidating. The Aussie is the underperformer again today as Q3 growth unexpectedly fell into contraction to -0.5%. Gold and silver are both mildly lower, whilst oil has started to drop back after news of record supply from Russia and OPEC despite the recent agreement to cut production in January 2017.

Traders will be watching for UK Industrial Production at 0930GMT which is expected to pick up by +0.2% for the month (last month having dipped by -0.4%), and for the year on year reading to improve to +0.5%. The Bank of Canada monetary policy is at 1500GMT although it is expected to stand pat on rates at +0.5%. The US JOLTS jobs openings are at 1500GMT and are expected to improve marginally to 5.50m (up from 5.49m). The EIA oil inventories are at 1530GMT and crude stocks are expected to show another drawdown of -1.5m barrels (-0.9m barrels last week) and will always tend to be volatile for the oil price.

Chart of the Day – Silver

Gold and silver will tend not to move independently of one another for too long. That is why it is interesting that the technical indicators on silver have picked up in recent days, whilst the gold price is still languishing. Whilst gold has been posting a series of lower highs and lower lows in a downtrend (see below), silver has been building support. This support is coming as the momentum indicators have been looking to lead the price higher. Special focus on the improvement on the Stochastics, but there has also now been a MACD lines crossover (similar to the one in October just prior to the last technical rally). It was interesting to see that Monday’s move above the near term neckline resistance at $16.89 failed to achieve the closing breakout which would complete the pattern and imply $0.75 of recovery to $17.64. Yesterday’s mild negative candle was a disappointment for the bulls and if the market falls away again today the recovery will begin to come under pressure again. The hourly chart shows that Mondays low at $16.48 is important for the near term outlook and will be watched as the hourly momentum indicators drift lower. The initial resistance is $16.88 under $16.98.

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Wednesday, 07 Dec, 2016 / 8:45

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