This week, was of course, dominated by one item of news, which was the much heralded announcement by the Federal Reserve on Thursday of a further round of quantitative easing, which came as no surprise to the markets. Indeed, since Ben Bernanke’s annual statement at the Jackson Hole summit of two weeks ago, where he hinted that the Fed was ready to ‘pull the trigger’ it was not a question of if, but when. Indeed the NFP data at the start of the month simply made this decision inevitable, since it is generally agreed that in order to drag the US economy out of its dire state, then the Fed will need to create an economic environment creating over 500,000 new jobs a month for the next five years, not the paltry 96,000 created in September. Whilst the announcement came as no surprise it was the underlying commitment to continue with QE3 until the recovery was underway, that pleased the markets, sending equities soaring and weakening the US dollar further. The US Fed is now committed to spending $40 billion a month buying bonds and mortgage backed securities until the foreseeable future.
The primary index where all of this has been clearly signaled over the last few weeks is once again on the US dollar index daily chart. The dollar index represents US dollar strength and weakness against a basket of major currencies, and over the last few weeks, the index has been falling strongly, as it moves into firmly bearish territory which now looks set to continue for the short to medium term. From a technical perspective the key level over the last 2-3 weeks has been in the 81.20 region as the index paused, ahead of the key announcements, creating a strong area of price resistance at this level, following two pivot highs on the 31st August and the 6th of September respectively. All of this of course was against the backdrop of bearish sentiment, first signaled back in early August, as the trading indicator turned bearish, followed by significant selling volumes on both the daily and the three day chart.
Since then our trading indicators have been confirming this bearish picture with further entry set ups, and with the three day trend now firmly bearish also, we can expect to see further US dollar weakness, driven by both fundamental and technical issues. Friday’s close on the December futures contract at 78.985, sent the dollar index to fresh lows, testing yet another key level of price support. If this is breached then we can expect to see the dollar weaken again, and the next key region is 75.29 area last seen in 2011.
This sustained bout of US dollar weakness has, of course, seen commodity prices rise sharply as a result. And in the metals market both gold and silver closed firmly higher on the week following periods of extended consolidation throughout the summer months. December gold futures closed the week $1772.70 per ounce and now look set to breach the $1800 per ounce region in due course, with the indicator remaining firmly bullish and strong buying volumes on both the daily and three day charts. This picture is also reflected in silver which too closed sharply higher at $34.655 per ounce.
Moving to energy the WTI December oil futures contract (CL) finally broke above the recent sustained sideways consolidation which has been moving between $94 per barrel and $97 per barrel, and closed on Friday at $99 per barrel, having briefly touched a $100 per barrel, intra day.Oil futures now look set to test three figures once again where strong price resistance awaits, but if breached will see oil continue to $105 per barrel and beyond in the short to medium term. The trend indicator on both the daily and three day chart for WTI remain firmly bullish and with strong buying volumes on both charts the outlook for oil remains positive. From a fundamental perspective crude oil supplies were up 2m barrels for the week ending 14th September against a forecast draw of 1.8m. In other energy markets natural gas, in storage, increased by 27bn cubic feet according to last week’s EIA data which was in line with market expectation.
Moving to the soft commodities, as expected the November futures contract for soya beans (ZS) paused last week touching a low of 1693.50 per bushel before recovering to close at 1739 per bushel on the week. Our trading indicator has turned dark red clearing signaling a pause in the market and with no demand volume on the three day chart we are now moving into sideways congestion between the 1700 and 1800 per bushel price area for the contract. The daily charts for both corn (ZC) and oats (ZO) mirror this price action, with corn closing the week at 782 and oats at 396.25, with both seeing selling volume appearing on the daily charts.
Finally of course in the forex markets, the sell off in the US dollar saw strong gains for all the major currency pairs, with the EUR/USD moving sharply higher and closing the week at 1.3129, squeezing the euro shorts still further. Cable followed suit moving to 1.6214, and along with the Aussie dollar which is once again testing the 1.06 region, all look set for further gains this week. In particular Cable could test the 1.6500 region soon with the EUR/USD moving back to test the 1.3300 area where further price resistance awaits. If this is breached then we could see the pair continue to move higher, and test the 1.3500 area last seen in February this year.
By Anna Coulling