Daily Briefing

US Dollar Strength, Euro Weakness Remain as Risk Aversion Shows Up

Price action and Macro.

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Talking Points:

- Last week’s rather visible move of US Dollar strength continues to hold as we open up a fresh week. DXY pulled-back from the 11-month high on Friday. This comes after a sizable move of strength in the Dollar coming from the European Central Bank’s rate decision, which helped to prod EUR/USD back-down towards the 1.1500-handle.

- While the ECB finally unveiled details for how they’re going to look to gradually exit from QE, the bank also shared a very dovish vantage point with markets by saying that they’re not anticipating rate hikes until at least through the summer of next year. Meanwhile, the Fed has been fairly clear about their intentions, updated most recently last Wednesday when the bank hiked rates for the second time in 2018. The FOMC wants to hike rates five more times by the end of next year, during which time the ECB expects to hike maybe once. This rate divergence is the driver behind the recent move in EUR/USD, but the big question is how much continuation power might be left. We look at the prospect of lower-high resistance in EUR/USD below.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

US Dollar Maintains Near 11-Month Highs After Last Week’s ECB-Fueled Burst

Last week was a big one across global markets as a number of drivers and potential new themes were unveiled. The Federal Reserve took a hawkish stance at their rate decision on Wednesday, but the immediate impact was weakness in the US Dollar as a report around increased US-Chinese tariffs began to circulate during Mr. Powell’s accompanying press conference. And then the following day saw the European Central Bank offer details on how they’re going to look to exit their massive stimulus program later in the year. They also shared that they’re expecting to keep rates at current levels ‘at least through the summer of 2019,’ and this led to a net response of a weaker Euro as markets kicked bets for rate hikes from the ECB further-out into the future. That move of Euro weakness was intense, and in short order the currency was below the 1.1600 handle while, in a corresponding move, the US Dollar had firmed up to the 11-month high. As we open this week, that resistance remains as the US Dollar lingers near those prior highs.

US Dollar via ‘DXY’ Daily Chart: Resistance at 11-Month Highs, Support 94.20-94.30

us dollar usd daily chart

Chart prepared by James Stanley

The big question in the early portion of this week is one of motivation. Will those themes of Dollar-strength and Euro-weakness that showed so prominently in the latter-portion of last week continue into this week? Mario Draghi is speaking on multiple occasions at the ECB forum in Sintra, and this will afford the ECB President multiple opportunities to clarify or define some of his prior statements; and this could continue to push the single currency as markets attempt to grapple with European rate expectations in the tail end of 2019.

On a longer-term basis, the swing-low from a couple of weeks ago looms ominously on the chart; and there’s the potential for lower-high resistance in a key zone should a deeper bounce build-in as we open this week. That area runs from 1.1685-1.1736, and this has been support or resistance multiple times over the past year. This area had shown as resistance after that brutal sell-off in the pair in May, soon becoming support as we walked into ECB. Prices broke-down around last week’s meeting, cutting directly through this area as sellers grasped control. If we do get a bounce into this zone, the door opens for bearish strategies, looking for lower-high resistance ahead of a print to fresh lows.

EUR/USD Daily Chart: Lower-High Resistance Potential in Key Zone 1.1685-1.1736

eurusd eur/usd daily chart

Chart prepared by James Stanley

This Week’s Economic Calendar

The ECB conference in Sintra is the highlight for the first few days of this week, but matters pick up on Thursday with rate decisions out of the Bank of England and the Swiss National Bank. No actual rate moves are expected at either meeting, but the details here are what’s important. At the Bank of England, the item of interest is whether the bank lays the groundwork for a possible move in August at their next Super Thursday rate decision; and in Switzerland, inflation just hit its highest level since 2011, printing at one-percent in the month of May.

DailyFX Economic Calendar: High-Impact Events, Week of June 18, 2018

DailyFX Economic Calendar High Impact Events Week of June 18, 2018

Chart prepared by James Stanley

Risk Aversion Potential in Equities

One of the more noticeable themes emanating from the one-two combo of last week’s FOMC and ECB meetings has been an uptick in risk aversion. The Dow Jones Industrial Average was bucking-up against a key area of resistance as we went into the Fed rate decision, and prices promptly began to turn-lower as the FOMC brought a hawkish tone to markets. Thursday saw a Doji build in the Dow as the ECB remained loose and passive, but Friday saw more selling; and so far futures markets are indicating more of the same as we open into a fresh week.

We had looked at a short-side setup in the Dow last Tuesday, and that theme has continued to show. On Friday, we published an update, looking for some element of support around the prior zone of support around 24,500.

Dow Jones Daily Chart: Turning From 14.4% Fibonacci Retracement (post-Election move)

Dow Jones Industrial Average DJIA DIA Daily Chart

Chart prepared by James Stanley

Risk Aversion in FX-Land: Look to the Yen

In our FX setups for this week, we looked at a currency pair that could be attractive should this theme of risk aversion continue to build. We had focused in on GBP/JPY for that purpose, looking to focus-in on Yen strength along with what could be an amenable counterpart in the British Pound, all while looking to avoid the Euro as the single currency has its own themes getting priced-in. Prices in GBP/JPY were finding resistance at a key level to close last week, and this opened the door for short-side stances, targeting a re-test of the 145.00 level that had turned prices around in March, followed by the May swing at 143.20 on the way to fresh lows.

GBP/JPY Daily Chart: Bearish Continuation Potential in Risk Aversion Scenarios

gbpjpy gbp/jpy daily chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

Contact and follow James on Twitter: @JStanleyFX

DXY Index Pauses at Yearly High as China-US Trade War Escalates

News events, market reactions, and macro trends.

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Talking Points:

- EUR/USD suffered its worst drop of the year yesterday following the ECB's dovish taper of its QE program.

- The DXY Index rally has run into resistance at the 2018 high, as well as the swing highs in July, October, and November 2017.

- Retail traders are once again net-short the US Dollar across the board, a contrarian bullish signal.

Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.

US Dollar Rally Hits Pause at Yearly High

The US Dollar (via DXY Index) has rallied to its highest level of 2018 following the trio of central bank meetings this week, the Federal Reserve on Wednesday, the European Central Bank yesterday, and the Bank of Japan today.

Policy divergence is clearly in the spotlight, as the Fed plans on pushing forward with a 25-bps rate hike every three months through the end of 2019, while both neither the ECB nor the BOJ expected to raise rates at any point over the next year. The earliest a tightening move is being priced in for either the ECB or the BOJ comes in September 2019, by which point the market is already pricing in at least four more Fed rate hikes.

DXY Index Price: Daily Timeframe (August 2017 to May 2018) (Chart 1)

DXY Index Pauses at Yearly High as China-US Trade War Escalates

The stark realization of the policy divergence yesterday produced the best day of the year for the US Dollar and the worst one for the Euro. The DXY Index today was able to briefly move back to its yearly high, resistance that coincides with the swing highs established in July, October, and November 2017.

Bullish momentum is reasserting itself for the DXY Index, with price now treating trading back above the daily 8-, 13-, and 21-EMA envelope. MACD and Slow Stochastics are starting to turn higher again in bullish territory. A close through 96.17 would signal that that next leg higher for the DXY Index is under way.

For now, traders may wait to see how developments around the China-US trade war unfold before a concerted break higher is achieved. Overight, the US announced $50 billion of tariffs on Chinese goods, and it was rumored that up to $100 billion of tariffs is also being prepared. Historically, an escalation in the trade war has proven to be a negative for the US Dollar.

Euro Drop Erases Past Two Weeks of Gains

The ECB's dovish QE taper (no plans on raising rates until summer 2019 at the earliest) proved to be a loud wake up call for market participants. US-German yield spreads continue to widen out to all-time record levels, and the bill has come due for EUR/USD now that policy divergence is being examined under a microscope.

EUR/USD Price: Daily Timeframe (August 2017 to May 2018) (Chart 2)

DXY Index Pauses at Yearly High as China-US Trade War Escalates

With a bearish engulfing bar (or bearish key reversal, depending upon your perspective) forming yesterday, price action has quickly resolved itself to the downside. The bearish momentum profile is gaining clarity, with EUR/USD trading below its daily 8-, 13-, and 21-EMA envelope. Concurrently, both MACD and Slow Stochastics are turning lower in bearish territory. A move back to the yearly low of 1.1510 can't be ruled out from here; a break would target the July 2017 swing low at 1.1479 initially.

Read more: US Dollar Gains as FOMC Hikes Rates, Outlines Plans for Two More in 2018


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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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Yen, Swiss Franc Aim Higher as Trade War Worries Hit the Markets

Fundamental analysis, economic and market themes

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  • Yen, Swiss Franc aim higher as trade war worries sour market mood
  • Australian, NZ Dollars may bear the brunt of risk-off selling pressure
  • Hawkish Fed-speak might help US Dollar continue to build upward

The anti-risk Japanese Yen and Swiss Franc outperformed as trade war worries soured risk appetite in Asia Pacific trade. Having dispensed with last week’s heavy duty event risk, financial markets have turned their attention to the threat to global growth posed by deepening fissures between the US and other top economies (as expected). The immediate trigger was a China’s response to US tariffs over the weekend.

BACKGROUND: A Brief History of Trade Wars, 1900-Present

From here, a sharp love lower in futures tracking the FTSE 100 and S&P 500 equity benchmarks signals the risk-off mood is likely to persist as London and New York come online. That seems likely to keep the Yen and Franc well-supported. Sentiment-geared commodity bloc currencies – the Australian and New Zealand Dollars in particular – might bear the brunt of selling pressure.

Meanwhile, the US Dollar may continue to build higher after last week’s explosive gains if incoming commentary from Federal Reserve officials echoes the hawkish tone of the FOMC monetary policy announcement. Scheduled remarks from Raphael Bostic and John Williams, presidents of the US central bank’s Atlanta and New York branches are due today.

See our free guide to learn how to use economic news in your trading strategy!


Yen, Swiss Franc Aim Higher as Trade War Worries Hit the Markets


European Trading Session Economic Calendar

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


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

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter