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US dollar looking corrective as Treasury yields fall

Market Overview

After a number of corrective signals failed to put the skids on the dollar rally in the past week or so, the most significant signals so far are beginning to suggest that profit-taking on the dollar will be taken more seriously this time. The driver of the recovery had been the sharp rally on Treasury yields in recent weeks, but this move is threatening retrace, with the two year and ten year yields lower today. This move is showing through on the US trade weighted dollar index which after a couple of days of consolidation is beginning to pull lower today. A close below last week’s low at 100.65 would confirm the near term correction. Markets will also be focusing on the key OPEC meeting’s this week with the main meeting on Wednesday. However the fringe meeting of members and Non-OPEC members (ie. basically Russia) will take place today and there are suggestions that Saudi Arabia (one of the major voiced in OPEC) will not take part, which would reduce the impact of this meeting and will make traders even more nervous. The oil price will be very volatile in the coming days and this could impact on market sentiment. It will also be interesting to see how the US returns from the Thanksgiving holiday.

In a shortened and thinly traded session, Wall Street was mildly higher (S&P 500 was +0.4% at 2213) whilst Asian markets were mixed today although the Nikkei was -0.1% with the yen strength. European markets are lower amid caution in early moves. Forex markets show the dollar is weaker across the board with yen and euro strength especially being seen.

The economic calendar is very light today with the Dallas Fed Business survey at 1530GMT which has been negative since January 2015 and would be an interesting development if it improved to above zero from last month’s -1.5. Additionally just before that, Mario Draghi speaks before the European Parliament’s economic committee at 1500GMT.

Chart of the Day – EUR/JPY

Euro/Yen has been improving consistently in the past few weeks as the move has been breaking through a series of key resistance levels to now of old lower key reaction highs. The price has also recent reached the highest level since the day of Brexit and the initial spike at 121.98. This was almost to the pip at the massive old key floor around 122.00 which had held throughout much of the first few months of 2016. From a technical perspective though, something far more interesting has occurred in the past couple of sessions. There has been a primary downtrend that has been used as the basis of key resistance for the major highs over the past two years. This is now being seriously tested and a close above 120.00 would constitute a major break. This will be a huge level of overhead supply in the coming day’s/weeks but a technical correction could be seen first. The early weakness today means a first negative candle in 6 sessions threatens as the market shies away from 120.00. The hourly chart is still threatening to lose upward momentum so the bulls will be watching initial support between 118.45/119.00, whilst the hourly RSI below 40 is a corrective signal too. I would be looking to back the bulls for this medium term recovery to continue and add further pressure on the long term downtrend. Holding above 118.45 support would keep the bulls in control of this improving chart for further pressure on 122.00. Key near term support is at 117.45.

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Monday, 28 Nov, 2016 / 9:23

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