The Dollar Eases Further As Tapering Fears Recede

Once again the dollar weakened against all the currencies we track, both the G10 and EM currencies, as expectations of higher interest rates in the US faded. The May 2015 Fed Funds futures for example are now 15 bps above their early Friday lows, and contracts further out are marked even higher as investors push out the probable date of Fed tightening. Another theme in the market is the idea that with President Obama struggling with Congress over his Syria policy, he is likely to have less political capital to push through the unpopular Larry Summers as his candidate to replace Ben Bernanke when the latter’s term as Fed chairman ends next January. That would make it more likely that Janet Yellen, the current deputy chairman of the Fed, gets the post. Yellen has been a big supporter of quantitative easing and is known to be more concerned about growth than about inflation right now. The market reasons that if she is nominated, the Fed is likely to keep interest rates low for longer than would be the case if Summers got the job.

It was notable that the commodity currencies and NOK were among the largest gainers yesterday despite further falls in oil prices as Syria accepted a Russian proposal that it should hand over all its chemical weapons to an international group. This suggests that the markets are discounting a stronger global economy. That might also explain why SEK was the biggest gainer. The Swedish economy is highly leveraged to global growth. If this is true, then I think the US economy is likely to overcome this recent soft patch in employment data and tapering should commence sooner or later. The question is whether the FOMC will be content to wait another month. The dovish San Francisco Fed President John Williams (2 out of 5 on the Reuters hawk-o-meter scale) yesterday said that recent economic data signal gradual job market improvement in line with his expectations, which suggests that the Fed could start some tapering at the Sep. 17th-18th meeting. A Bloomberg poll taken after the payrolls data showed economists expect the Fed to taper bond buying by $10 billion at the meeting, which could surprise the FX market. But, until then we are likely to see further gains by the commodity currencies in particular, which have been severely depressed recently.

We already got the only indicator for the day from the UK: the RICS (Royal Institute of Chartered Surveyors) house price balance. This shows the percentage of surveyors who see house prices rising minus the percent that see prices falling. It rose to 40% from 37%, which was above expectations of 39% and could boost GBP today. As for the Eurozone, there are only second-tier indicators out today. French industrial production is expected to have risen 0.5% mom in July, a turnaround from -1.4% mom in the previous month, another sign that the Eurozone economy is bottoming out and a possible support for EUR. In US, the National Federation of Independent Businesses (NFIB) small business optimism survey for August is forecast to rise to 95.0 from 94.1, which is important in that as small businesses are major employers. Also, the JOLTs (job openings and labor turnover) report is expected to show 3.9 million job openings in July, down slightly from 3.936 million in June, which was the highest level in five years. That would show a relatively healthy job market even though the number of jobs being added each month has been falling recently and could aid the case for tapering, thereby supporting the dollar.

The Market

EUR/USD

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EUR/USD moved significantly higher, breaking the upper boundary of the downtrend channel and the 1.3239 level (yesterday’s resistance). Currently the pair lies between the 1.3239 (S1) support and the psychological resistance of 1.3300 (R1), where a clear upward penetration should drive the price towards the next round number of 1.3400 (R2). Additionally, momentum signals confirm the bullish attitude of the pair, since the oscillator lies above its trigger line in bullish territory and positive divergence is observed between the MACD and the price action.

Support: Support is found at the 1.3239 (S1) level, followed by 1.3188(S2) and 1.3134 (S3)

Resistance: Resistance levels are the psychological round numbers of1.3300 (R1) and 1.3400 (R2) followed by the 1.3448 (R3) level.



USD/JPY

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USD/JPY is moving sideways, remaining for a third trading day between the 99.13 (S1) and the resistance of 100.00 (R1). If the longs attempt once more to overcome that strong hurdle and they succeed, bullish extensions should be triggered towards the 100.84 (R2) and 101.52 (R3) resistance levels. However, both RSI and MACD oscillators lie at their neutral levels, providing no indications for the pair’s momentum. On the long-term (daily chart), the rate is still trading above the upper boundary of a symmetrical triangle, adding positivity to the price action.

Support: Support levels are at 99.13 (S1), followed by 98.09(S2) and the round number of 97.00 (S3).

Resistance: Resistance is found at psychological level of 100.00 (R1), followed by the levels of 100.84 (R2) and 101.52 (R3).



GBP/USD

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GBP/USD continued moving higher and managed to break above the 1.5674 level (yesterday’s resistance). At the time of writing the pair is lying between that level and the resistance of 1.5752 (R1). A clear win of the bulls at that level should extend the current move towards new short term highs. The MACD’s positive value and the fact that the 20-period moving average lies above the 200-period moving average make such a breakout likely, in our view.

Support: Support levels are identified at 1.5674 (S1), 1.5569 (S2) and 1.5425 (S3) respectively.

Resistance: Resistance found at the levels of 1.5752 (R1), 1.5840 (R2) and 1.5892 (R3), the latter two found from the daily chart.



Gold



Gold moved lower after finding resistance at the 1394 (R1) level and at the time of writing is testing the 1376 (S1) support level. A clear penetration below that level would mean that the correction we are experiencing since the 28th of August is still in effect. The precious metal lies above the 200-period moving average and the blue uptrend line, thus we believe the overall trend is still an uptrend. Also, the MACD oscillator lies below zero but above its trigger, pointing upwards; an entrance into its bullish territory might be the first sign for the correction’s completion.

Support: Support levels are at 1376 (S1), followed by 1347 (S2), and 1320 (S3).

Resistance: Resistance is identified at the 1394 (R1) level, followed by 1422 (R2), and 1440 (R3).



Oil



WTI moved lower and once more returned to its familiar territory below the 108.82 (R1) level (yesterday’s support). It seems that the long holders of the contract are not strong enough to maintain the price above that boundary. If the price keeps falling, it might challenge the 106.71 (S1) and 105.23 (S2) support levels. The RSI oscillator returned near its neutral level confirming the indecision for the next directional movement.

Support: Support levels are at 106.71 (S1), 105.23(S2), and 103.44(S3).

Resistance: Resistance levels are at 108.85 (R1), followed by 110.58 (R2), and 112.14 (R3).



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