Disconnect as Treasury yields dip on Fed, but dollar gains

Market Overview

The Fed hikes interest rates and the market gives little real reaction, that is a central bank’s ideal scenario. A 25 basis point increase, a shade higher in terms of growth expectations and the removal of the sentence in the statement on “accommodative” rates. That was basically it from the Fed. However, the reaction in the immediate aftermath was very muted, as chair Powell tried to downplay the significance of the change to the statement. As the end of the tightening cycle seems to be coming closer, removing the part about rate being accommodative would be a natural step and this plays into the maturity of this tightening cycle. The market has taken this as a mildly dovish move from the Fed and it was interesting to see that Treasury yields did not go higher by any real degree on the announcement, instead are now coming lower. The 2 year Treasury yield now stands 2 basis points lower and the 10 year yield over 3 basis points lower (so a mild bear flattener then). However the currency moves are in divergence to this as the dollar has gained some ground overnight, even as yields have dropped back. This could be explained perhaps in some part by Trump’s ongoing belligerence against China (at the UN Security Council this time). Despite this though, with the bond yield failing to get any upside traction from this Fed hike, the dollar strength may be short-lived.

Dollar

Wall Street ended lower on the session with the S&P 500 -0.3% at 2906 whilst futures are a shade lower in early moves today. This has not helped Asian markets which see the Nikkei -1.0% (a yen rebound will not be helping in this regard), although Chinese equities are broadly flat. In Europe, the markets are mildly lower, with the DAX underperforming which suggests this could be a retreat in risk appetite that is a driver and the Fed is already being forgotten. In forex, there is broad dollar strength across the majors, with the one notable exception being the yen which is a mild outperformer. In commodities, gold is holding steady, whilst oil has regained some of its ground lost during yesterday’s slip on higher EIA inventories.

The economic calendar for today is once more very US centric, however there will also be an eye on German prelim inflation today as it could give a clue for how Eurozone inflation comes in tomorrow. State-level German inflation is released throughout the morning whilst the German national inflation is at 1330BST and is expected to remain at 2.0% (2.0% in August). As for the US data, the Durable Goods Orders for August at 1330BST are expected to show core Durable Goods (ex-transport) growing by +0.5% for the month (+0.2% month on month growth in July). The final reading of Q2 US GDP is expected to be re-iterated at +4.2% (+4.2% at the prelim reading). The US Pending Home Sales at 1500BST are expected to fall by -0.4% in August (-0.7% in July). There will also be speeches by central bankers with the ECB’s Draghi at 1430BST who has moved the euro in recent weeks with a more hawkish tone, with Fed chair Powell at 2130BST (although coming in the wake of the FOMC yesterday there is likely to be little new here), but also the Bank of Canada’s Stephen Poloz who is speaking at 2245BST.

Chart of the Day – CAC 40 Index    

The rally on the CAC has reached a key tipping point. For the past four months the market has been trading in a broad range between 5226/5560 with moves around a series of flat moving averages and neutrally configured medium term momentum indicators. This comes with the key medium term swing lows all coming between 30/35 on the RSI whilst the key highs all come around 65, suggesting very ranging conditions. However is this about to change? The RSI has closed at a four month high yesterday and with the recent two week uptrend recovery pulling higher into a band of resistance between 5504/5560 the bulls are looking to maintain the momentum needed for a medium term breakout. Yesterday’s decisive bull candle with a close at the high of the day is a positive way to resolve a brief period of consolidation in recent sessions, whilst the uptrend support is 5484 today. The bulls will also look at encouraging positive configuration with upside potential on the hourly momentum indicators whilst 5463/5499 is now supportive. How the buyers react to any intraday weakness today could be telling as to the potential continuation of the run higher. A closing break above 5560 would open the May 2018 high of 5657 which is a ten year high.

EUR/USD

It is interesting to see a mild dollar strength move come out of the Fed meeting announcements. This resulted in a slightly negative looking candle yesterday and a continuation lower today. The move has also meant that the uptrend of the past couple of weeks has been broken by this bout of dollar strength, meaning that the prospects of a medium term base pattern may need to be put on hold for now. The corrective move on EUR/USD is not especially damaging yet, but the momentum indicators could play a role here as the Stochastics have started to turn lower. The hourly chart shows that the initial support at $1.1720 is being breached this morning and a consistent move below would put pressure on next support at $1.1650 as the next pivot. Resistance is now building between $1.1750/$1.1800. How the bulls react in the next couple of days will be very telling as to the potential for a continued euro recovery.

GBP/USD

The recovery on sterling that has been a feature of the  early part of this week has been put on hold in the wake of the FOMC meeting. Mild dollar strength has initially looked to pull Cable lower today. Although this is only a minor move so far, the support around $1.3050 is a key pivot area and a breach would signal a shift in the near to medium term outlook. The momentum indicators need to be watched as for now they are all sill positively configured, but should the RSI and Stochastics drop below 50, and MACD bear cross (all of which is possible again), this would be a negative influence on the chart. Yesterday’s high of $1.3215 is forming a potential lower high too under the $1.3297 peak from last Thursday. The hourly chart shows a deterioration in the near term outlook, with support initially at $1.3090 to be watched. A breach of $1.3050 on a closing basis along with a $1.29 handle would open $1.2800 as key support.

USD/JPY

The dollar strength does not seem to have stretched to Dollar/Yen, as a bear candle formed yesterday has threatened to continue lower again today. The uptrend of the past two and a half weeks has been broken by the move lower, but also of note is that yesterday’s high was almost bang on the 113.15 resistance before it turned lower. For now the outlook has to continue to be one to buy into weakness, and the old resistance at 112.15 is a basis of support. Momentum indicators are taking account of the slip back but for now there remains a positive configuration. Keeping any eye on the Stochastics (which have rolled over slightly) may be important  in the days ahead though.

Gold

Aside from a little intraday volatility for an hour or so, the FOMC meeting has done little to change the outlook for gold. With the market in need of a catalyst, perhaps that is a shame. The early minor bout of selling pressure subsequently held into the close yesterday and a slightly negative candlestick has been formed. Closing the session under $1200 has given the chart the slightest negative bias as the momentum signals on RSI, Stochastics and even MACD have ticked a shade lower. However, this all remains near term noise within the ever expanding range play. The fact that the market dropped to $1190 (below initial support at $1191.50) could also hint at a minor growth of a negative sentiment too. Initial support at $1187 will be watched, whilst a breach of $1183 would be key. Initial resistance is now $1203.70.

WTI Oil

The surprise build in EIA crude stocks hit WTI yesterday as the price slipped back with a slightly corrective negative candlestick. However this looks simply to be a correction within the bull trend higher one more. The consistent closes above the $71.65 resistance earlier this week seems to have indicated a shift in sentiment for a breakout, meaning that the old resistance band $70.40/$71.65 is now supportive. The bulls will be on the lookout for the next bull signal that would be a chance to buy. Subsequently already today the market is buying the weakness to leave initial support around $71.50. This positive outlook of buying into weakness will remain intact whilst the support at $70.00 remains solid. The uptrend of the past six weeks comes in as a base of support now at $69.40 and momentum indicators remain strongly configured in a way that suggests corrections are increasingly a chance to buy. Resistance is building at $72.75 after two days of highs around that level and now is a near term barrier preventing a continued higher to the key July high $75.25.

Dow Jones Industrial Average

The near term corrective slip back on the Dow remains a factor for traders, but this move should still be a chance to buy. Despite this though, momentum in the corrective move is beginning to grow. A third solid bear candle continues the move to unwind last week’s sharp run higher and the support band at 26,030/26,168 is increasingly coming back into view. Although the daily momentum indicators are still swinging mildly lower, it is interesting to see that hourly momentum is now around areas where the recent bull moves have resumed. If the bulls an prevent any negative signals then the retracement is still likely to be viewed as an opportunity for the next leg higher. Key resistance remains 26,769 which is the all-time high, whilst yesterday’s post-FOMC high of 26,606 will also be a marker.