Daily Briefing

U.S. Dollar Sets Fresh One-Year Low: FOMC on Deck for Next Week

Price Action, Swing & Short Term Trade Setups

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Talking Points:

- The U.S. Dollar bearish trend has continued as ‘DXY’ set a fresh One-Year low this morning.

- The Fed has a rate decision scheduled for next Wednesday, but perhaps more pertinent to the U.S. Dollar will the U.S. data prints offered throughout next week.

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The pain trade in the U.S. Dollar has continued as ‘DXY’ has moved down to set fresh one-year lows after yesterday’s ECB meeting. The level of 94.08 was the swing-low set in August of 2016; and earlier this morning we saw DXY slide down to a fresh low of 93.99, which would be the lowest level for the Dollar since the ‘Brexit move’ on June 24th of last year. This was also one of the deeper targets from our Q3 forecast, with one target remaining at the level of 93.00.

DXY Slide Continues: Fresh One-Year Lows on Breech of August, 2016 Swing

U.S. Dollar Sets Fresh One-Year Low: FOMC on Deck for Next Week

Chart prepared by James Stanley

Next week brings a rate decision from the Federal Reserve. This meeting will likely be with a little less fanfare than usual, as there are no expectations for any policy changes and the bank is not hosting a press conference after the rate decision. What we will get, however, is the updated statement from the Federal Reserve; and with the next rate decision being almost two months later (September 19-20), these comments can be relevant for market participants trying to assimilate the odds of any near-term rate moves. But perhaps more critical to those forward-looking rate expectations will be the US-data prints offered throughout the week: Consumer Confidence is on Tuesday, Durable Goods and Advanced Trade Balance on Thursday and GDP on Friday.

The issue for the U.S. economy at the moment appears to be data. Economic data prints have continued to disappoint throughout 2017, so even though we’ve now seen three rate hikes over the past eight months along with the Fed’s assurances of more to come, the U.S. Dollar has simply been unable to catch a lasting bid.

As we came into 2017, the Dollar was flying-higher on the back of the ‘reflation trade.’ Hopes ran high for a resurgence in the U.S. economy, and we even started to see that growth spread into Europe and parts of Asia. But as those hopes for continued growth and ‘reflation’ in the U.S. economy continued to move-higher, so did expectations; and data out of the U.S. in 2017 has, so far, been unable to keep pace with those elevated-expectations.

The Dollar has moved down by as much as 9.5% from the 2017 high, set on just the second trading day of the year. The big question, at this point, is what could the Fed say or do that could turn the tide of this trend? But perhaps more importantly – would they want to?

Shortly after we saw the first rate hike from the Fed in over nine years, and this is when the bank was one of the few major central banks investigating tighter policy options, Fed Chair Janet Yellen directly said that one of the biggest forward-looking risks that the bank faced was the prospect of considerable Dollar strength as capital flows ran into the Dollar. And if the Fed was the only game in town for higher rates, this would be a stampede that could be difficult to stop or even slow-down. If left unchecked and if Dollar appreciation continued, this could eventually hit exports as a strong Dollar made exports just that much more expensive overseas.

But one year and a Presidential election later, that problem is non-existent; as the prospect of continued growth and inflation in Europe has begun to drive capital flows into the Euro in anticipation that the ECB will begin to walk towards ‘less loose’ policy options. We’ve even started to see expectations for actual rate hikes out of the ECB by the end of next year, and this has continued to drive bullish price action into the single currency.

EUR/USD Daily Chart: A Bullish Break of Bullish Channel – Fresh 23-Month Highs

U.S. Dollar Sets Fresh One-Year Low: FOMC on Deck for Next Week

Chart prepared by James Stanley

For Next Week on the Dollar

Keep expectations around FOMC relatively low. The bank just hiked rates, and is likely in the observatory period where they want to ensure that nothing goes awry. So we likely won’t see any provocative statements or comments, as the Fed probably just wants to hold the line without looking too deeply at this gift horse that’s been provided by higher rate expectations in Europe.

More pertinent, however, will be how this collection of data prints come-out and whether or not we can see some semblance of support form in the Greenback. The Dollar is oversold, and the Euro is overbought – so we might not need much to create a retracement in either of those trends.

But it’s the retracements that show what the move is worth. If bulls are staying active in the Euro and bears are staying active in the Dollar, we should see some element of response at resistance levels as market participants try to use that retracement move to add-in exposure to prevailing trends. Below, we’re looking at potential resistance levels in DXY and support levels in EUR/USD.

U.S. Dollar via ‘DXY’ with Potential Retracement Zones Applied

U.S. Dollar Sets Fresh One-Year Low: FOMC on Deck for Next Week

Chart prepared by James Stanley

EUR/USD Four-Hour Chart with Potential Support Zones Applied

U.S. Dollar Sets Fresh One-Year Low: FOMC on Deck for Next Week

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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USD at New Lows as EUR Hits 2-year High; CAD in Spotlight

News events, market reactions, and macro trends.

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Talking Points:

- Euro strength continues despite move lower in core European yields - a rare disconnect between bonds and FX.

- Canadian CPI and retail sales data this morning may finally give pause to the torrid Canadian Dollar rally.

- See our Q3'17 forecasts for the British Pound, Euro, US Dollar, and more.

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The US Dollar has sunk into its lowest levels since August 2016 as the Euro surge following the European Central Bank rate decision yesterday has continued. With the Euro now at a two-year high versus the US Dollar, the DXY Index (being comprised of 57.6% Euro) has been punished.

The market reaction to yesterday's ECB meeting was notable for a few reasons. First, in a lower volume, thinner liquidity environment - part and parcel of summer trading - it's hard to put too much stock in any one move; participation is too low.

Second, European government bond yields fell around ECB President Mario Draghi's press conference - from Germany to Italy - which runs counter to the price action seen in the EUR-crosses. Typically, the Euro (like all other major currencies) follows short-term interest rates, so a decline in 2-year yields across the region would suggest a drop in the Euro (this obviously did not happen!).

Third, it seems as if the market has its mind made up about the ECB tapering; or rather, the dovish tendencies Draghi exhibited yesterday were nothing more than a distraction. Market participants know the ECB will run into issue limits and capital key problems if it doesn't taper, so suggestions otherwise are farcical at best.

Chart 1: EUR/USD versus US-German 2-year Yield Spread (April 2016 to July 2017)

USD at New Lows as EUR Hits 2-year High; CAD in Spotlight

Between the largest net-long Euro position in the futures market since May 2011 and a rather large divergence between the US-German 2-year yield spread and EUR/USD, it would appear that the Euro is getting into fundamentally overbought territory versus the US Dollar. For now, though, EUR/USD remains technically well-supported, with bullish momentum firmly to the topside; it's still too early to call the top.

See the above video for a technical review CAD/JPY and USD/CAD ahead of Canadian CPI and retail sales data today, as well as the DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/USD, AUD/JPY, Gold, Crude Oil, and US yields.

Read more: Preview for ECB Rate Decision and Outlook for EUR-crosses

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

Fundamental analysis, economic and market themes

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Talking Points:

  • Aussie Dollar sinks as RBA’s Debelle talks down hawkish policy bets
  • New Zealand Dollar revels in deteriorating Fed rate hike speculation
  • Lull in top-tier data, indecisive risk trends make for clouded outlook

The Australian Dollar plunged after RBA Deputy Governor Guy Debelle poured cold water on hopes for a more hawkish policy stance. The central bank said it believes the so-called “neutral” policy rate – a setting that is neither loose nor tight – is now above 3 percent. That makes the current official cash rate of 1.5 percent decidedly accommodative, so markets read the announcement as setting the stage for tightening.

Mr Debelle would have none of it. He bluntly said that there is “no significance” in the Board’s discussion of the neutral rate and added that Australian borrowing costs don’t have to rise with global peers. As if to really drive the message home, Debelle argued that a stronger Aussie Dollar undermines economic gains offered by faster global growth, then blame rate differentials for the currency’s strength.

Meanwhile, the New Zealand Dollar traded higher broadly higher. The currency traded inversely of a drop in US Treasury bond yields, hinting that gains reflected the influx of yield-seeking capital flows against the backdrop of deteriorating Fed rate hike expectations. Tellingly, outside of the Aussie’s plunge, the US Dollar was the worst-performing currency in Asian trade.

From here, a dull offering of European and US economic data laves prices without immediately obvious inspiration. A strong sentiment-based signal is also absent. Asian shares edged lower but S&P 500 and FTSE 100 futures are treading water, arguing against a strong risk-off lead. This might make for a quiet end to the trading week, although the threat of volatility-inspiring headlines from Washington DC remains as ever.

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Asia Session

NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

European Session

NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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