Dollar Pares Losses

Daily Analysis - 22/09/2015

Hawkish Fed Views Combined With Dovish ECB Commentary Sees Dollar Erase Post-FOMC Weakness

The US dollar posted a strong recovery after sliding last week. Dovish comments from various ECB officials on further monetary policy easing saw the Euro decline versus the Greenback as Fed officials saw the potential for a 2015 liftoff.

Fed Keeps Hope Alive

In a day marked with virtually no major macroeconomic releases, the US Dollar found support from both sides of the Atlantic. In Europe, various ECB officials were heard remarking that the European Central Bank's asset purchase program could be expanded to account for current conditions. In the US, St. Louis Federal Reserve President James Bullard noted that there was a chance of a rate hike in October during an interview while lambasting current market cheerleading. However, despite the currency markets reacting to the verbal talkdown, according to CME futures, the Fed Funds rate was pricing in a 50% probability of a rate hike in January 2016. For the near term, comments from the Fed and ECB officials highlighted the diverging monetary policies. EURUSD which has weakened notably since Friday, declined a further -0.88% yesterday to close at 1.1189.

Crude Oil Surges

WTI crude oil prices rallied yesterday, rallying 3.48% to settle the day at the highs of $46.45 per barrel. The momentum higher came amid the Baker-Hughes report which showed a third consecutive week of declines in the US oil rig count. The US Energy Information Information is expected to lower its projections for expected production levels for the end of 2016 during its weekly Department of Energy oil inventory report due mid-week. WTI futures have formed an inside bullish harami candlestick pattern on the daily chart which indicates an impending potential breakout in the near-term. There is a strong support level formed at $44.11 which is likely to hold any downside declines in the near-term. Crude oil stocks due later in the session could propel prices even higher if another drawdown to inventories is experienced.

Equities Recover

US equity benchmarks closed in the green yesterday with the S&P500 futures gaining 0.65% to close at 1974. While concerns about the future of earnings for American corporations remains in doubt as most of the gains have been fueled by buybacks, stocks have nevertheless been buoyed by the Federal Reserve’s postponement of interest rate normalization. However, the more medium-term bias remains to the downside after the break of the rising trendline. The next main lower support level at 1923 is currently awaiting for a retest on a break of the immediate support at 1961, the level from which the S&P500 equity index opened yesterday. To the upside, resistance is sitting at 1982 and a potential break above this resistance level could see a renewed bullish momentum overtake the equity markets. But from the technical perspective, the shooting star candlestick pattern shows a potential decline to the downside in the near-term.

XAUUSD Ascending Triangle Technical Pattern

After yesterday’s sharp drop following commentary from Central Bank policymakers, gold prices are gradually recovering from earlier weakness. Much of the weakness was attributed to the surging US Dollar which continues to gain on the back of the renewed hawkish outlook being touted by some Federal Reserve policymakers. While long-term, any further appreciation in the dollar is likely to weigh on the outlook for gold prices, in the near-term a rebound higher might be possible as traders cue up for a possible October hike. The ascending triangle pattern emerging in gold prices has a strongly bullish bias with any move above key resistance at $1134.50 indicating an upside breakout to be accompanied by additional momentum and volume. A move back to the downside below the key pivot at $1132 that sees prices fall below the short-term uptrend line could indicate a reversal lower.