Falling Treasury yields driving a dollar correction

Market Overview
The outlook for the dollar continues to be driven by Treasury yields and with the yields dropping back the dollar is coming under corrective pressure. With the 10 year Treasury yield dropping back to 2.40% (which is the lowest since 9th December) the US Trade Weighted Dollar Index has also fallen away and is testing the support of the late December low at 101.90. A closing breach of this level would confirm the dollar having become corrective. This move on Treasury yields is not being driven by the FOMC minutes, which actually showed a concern that expansive fiscal policy might drive a need for steeper tightening. This is seen as a clear nod towards President-elect Trump, although he was not mentioned by name. Equities tend to struggle during tighter monetary policy and there is a mildly lower move seen in Europe today.
Wall Street did though manage to edge higher with the S&P 500 up by 0.5% at 2271, whilst the Nikkei was off by 0.4% on a stronger yen. The early European moves are also being seen as cautious. In forex the dollar is weaker against all the majors, with the yen the standout performer. Gold and silver are also benefitting from the dollar correction, both over 1% higher, whilst oil is marginally lower, so far unable to continue yesterday’s rebound.
The services PMIs for the UK and US will be the key focus, with UK Services PMI at 0930GMT expected to drop back slightly to 54.8 (from 55.2) however with the big upside surprises for the UK manufacturing and construction sectors in recent days, hopes will be high for a positive surprise in the service sector that dominates the UK economy for around 80% of output. The ISM Non-Manufacturing is at 1500GMT and is expected to dip slightly to 56.6 (from 57.2). US employment is another focus today with the ADP employment change at 1315GMT which is forecast to drop back to 171,000 (from 216,000) which some people see as a harbinger for Friday’s payrolls, whilst the US weekly jobless claims at 1330GMT are expected to stay around recent levels at 262,000. The EIA crude oil inventories are at 1600GMT which is expected to fall by 1.8m barrels.

Chart of the Day – Silver
The near term move against the dollar is also showing through in a pick-up in the silver price. Tuesday’s strong bull candle was continued yesterday with further gains and the near term outlook has certainly started to improve. Momentum indicators are recovering with the Stochastics rising and the RSI back above 50. However this still has a look of a bear market rally to it. The big barrier to gains overhead remains around the $17.08/$17.24 resistance and whilst the near term outlook may have some upside potential, the bears could easily be biding their time for the next chance to sell. The price has made a series of key lower highs in the past 7 months, whilst the RSI has continually failed between 50/60 in the past 5 months. The hourly chart shows the upside break above $16.25 opens a recovery towards $16.70/$16.90 today (which is already close), with resistance around $16.62 having also been breahed. Support is around the breakout at $16.12/$16.25 before $15.80 and the key low at $15.59.

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