It has been incredibly hard to bat against the strength of the US dollar (USD) in the last couple of weeks. Sharp USD gains have impacted financial markets, with forex majors and subsequently commodities all suffering. As we approach the Thanksgiving holiday, we look at whether there is any sign of a push back against this tide of USD strength. We also look at whether the corrective move on indices is just another chance to buy.
- USD remains strong but this may begin to stall if yields do not continue higher
- Forex majors retain a USD positive bias
- Commodities beginning to show signs of tentative support
- A risk negative bias allows FTSE 100 to outperform major indices
USD strength but yields need to continue higher
USD has been extremely strong in the past two weeks. There has been consistent buying pressure ever since the US CPI shot way above expectations. This was exacerbated by the announcement that Fed chair Powell would be continuing in his position for another four years.
Our medium-term outlook (for Q1/Q2 2022) has been for Dollar Index to move towards 96.50/97.80, however, this appears to be underway much sooner than we had expected. Despite this, the current USD strength move is stretched and there is elevated potential for a near-term unwind.
The key could come with bond yields now. The 10 year Treasury yield is nearing a key barrier of 1.70/1.77. The significance of this barrier may begin to restrict the move on the USD in the coming days.
Forex majors showing little sign of fighting back the tide
Looking at major forex pairs, the strength of the USD is a standout in November, outperforming every major currency.
This has continued today, with EUR/USD breaking down once more, whilst AUD/USD and NZD/USD are hitting new multi-week lows. There is still a clear appetite to buy USD and the trend is strong. It would be a brave trader that stands in the way of this move (or at least one with deep pockets).
There are few signs of any respite, but we continue to look for exhaustion signals on momentum indicators, with our preference for a near term turnaround still in GBP/USD. Cable needs to move above 1.3410 on the 4 hour chart to suggest potential recovery. However, the more considerable resistance comes at 1.3515.
Commodities could be finding support
As the recent sharp corrections have gone beyond where we were hoping for, we have been looking for a reaction by the bulls on gold and silver. The medium-term outlooks are still shaping for recovery, but the buyers need to respond soon otherwise these recoveries will be aborted.
It may still be too early, but this morning, we notice how Gold (MT5 code: XAUUSD) is relatively settled, holding up above yesterday’s reaction low at $1782. This will need to continue into the close tonight but also begin to form higher lows to suggest some improvement in the outlook. The key resistance is $1802/$1812 which needs to be breached to engage a serious recovery again. Trend support is at $1770 and the key price support is $1758.
Negative bias to indices
We have seen throughout November that the defensive indices (Dow and FTSE 100) have been fairly steady but underperformed. Whereas the higher growth indices (NASDAQ and DAX) have been far more volatile. With market sentiment still under negative pressure, there is mounting corrective pressure on NASDAQ and DAX especially.
With Risk appetite turning sour in recent sessions. This is still weighing on the S&P 500 futures today and is why the DAX is again the big underperformer. The charts show that the German DAX (MT5 code: GER30) is now back to key support around 15,750/15,800. A breakdown opens the next support at 15,500.
This is in contrast to FTSE 100 (MT5 code: UK100) which looks far more secure in its correction into support. We are now looking for FTSE 100 to build from support once more around 7200/7250. Whilst risk appetite remains negative, we expect FTSE 100 to continue to outperform.
