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Gold, Yen Primed for USD Volatility around Jackson Hole

Price Action, Swing & Short Term Trade Setups

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Talking Points:

- The economic docket is light until Thursday with the release of U.S. Durable Goods, but the Jackson Hole Economic Symposium, beginning on Thursday, will likely dominate the headlines as a ‘who’s who’ of Global Central Bankers gather in Wyoming to pontificate around monetary policy.

- Of recent, Fed chiefs have transmitting a hawkish read towards future policy moves, but markets don’t seem to be buying this as expectations for a hike in September remain low at ~15%, and December at 39.9%. Will Ms. Yellen prod these higher by echoing this hawkish sentiment?

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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The next couple of days could present somewhat of a lull for markets with no high-impact data to be released until Thursday; but this may not last for too long with the Jackson Hole Economic Symposium scheduled to kick-off on August 25th, with a widely-awaited speech from the Chair of the Federal Reserve, Ms. Janet Yellen, set to take place on Friday. Considerable focus will likely be steered towards whether or not Ms. Yellen signals that the Fed may be looking to hike rates at their next meeting in September, or perhaps even December. And while this wouldn’t come out of left field as we’ve heard three such instances from three different Fed members over the past week, markets are still of the belief that no rate hikes will be happening anytime soon. Odds for a hike in September are currently sitting at 15% while December is at 39.9%.

So the stage is set for heightened volatility, particularly in US Dollar markets as traders attempt to read the Fed’s intentions for near-dated meetings regarding potential rate hikes. On the charts below, we look at two of the more interesting price action setups as we approach the Jackson Hole Economic Symposium.

Gold

Gold prices have seen massive benefit this year as rate hike expectations out of the Fed have shuddered-lower. And this comes fresh on the heels of a down-trend that lasted for over four years, driven by the longer-term trend of strength in the Greenback as markets attempted to price-in the inevitable ‘tapering’ of QE and the eventual prospect of ‘normalization’ of interest rate policy. But those aims for normalization haven’t worked out too well so far: The Fed spent much of last year attempting to prepare markets for a single rate hike, and they didn’t get this launched until December. But when they posed that hike, they also accompanied the move with the expectation to hike a full four times in 2016. So this was somewhat like jumping straight in the deep-end of the pool after coyly dipping your toes in the water because it was far too cold.

Within short order of that hike, markets convulsed as the litany of risk factors prodded risk aversion around the world. Six weeks into the New Year and the Fed began to relent, beginning with Chair Yellen’s twice-annual testimony in front of Congress, and this led to another three months of Dovish Fed commentary that continued to drive rate expectations and the U.S. Dollar lower; benefitting Gold prices massively as the yellow metal rallied 26.2% so far on the year.

Gold, Yen Primed for USD Volatility around Jackson Hole

Created with Marketscope/Trading Station II; prepared by James Stanley

But this hasn’t been a linear move: In May the Federal Reserve talked up the prospect of a rate hike in June, and this drove USD Strength after three months of weakness; denting Gold prices by more than $100 throughout the month. But as has become usual, bad data for the month of May reversed these rate-hike hopes, and the U.S. Dollar moved back into its downtrend, prodding Gold prices higher.

As we approach the Jackson Hole Symposium, Gold prices are working on a symmetrical wedge formation that’s been building for the past six weeks. Should Ms. Yellen echo this hawkish sentiment that we’ve seen from William Dudley, Dennis Lockhart and Stanley Fischer, this could create USD strength, pulling Gold prices down to longer-term support levels that could be attractive for ‘bigger picture’ long stances.

Gold, Yen Primed for USD Volatility around Jackson Hole

Created with Marketscope/Trading Station II; prepared by James Stanley

The Yen

The Yen is another market that’s seen considerable volatility this year, and this one isn’t entirely at the drive of the Federal Reserve. Last year we looked at the Japanese Yen as the ‘safe haven vehicle of choice’ as pressures from China continued to build. After three-plus years of QE had been unable to turn the deflationary tides in Japan and as the BoJ bought-up an increasingly larger share of the Japanese Government Bond market, it appeared as though the bank might be running out of ammunition; at least with their current policies. This has driven USD/JPY from the ¥125.00 area last August all the way down to the critical psychological level of ¥100.00.

This is a gigantic change for Japanese exporters, and for an economy that’s already struggling with decades-worth of deflationary momentum, this could present much more than just a temporary economic issue to tackle. After Shinzo Abe’s Conservative party won a super-majority in the upper-house of Japanese parliament last month, expectations began to increase for more economic action out of Japan; with some hopes even going so far as to expect the initiation of the highly-theoretical ‘helicopter money.’ But when the Bank of Japan underwhelmed at their policy meeting later in the month, those hopes got priced-out of the market as the Yen rallied towards prior highs (lows in USD/JPY).

As we approach the Jackson Hole Economic Symposium, USD/JPY finds itself sitting right on psychological support at the ¥100-handle. This market could be especially attractive in the event of USD-weakness, as that could proffer a break of the psychological ¥100.00 level, and this could offer attractive entries for longer-term position-based setups.

But should Ms. Yellen strike the hawkish tone that her colleagues have been sharing over the past week, this could give a bounce off of this support level as traders price-in USD strength in combination with an expectation for an eventual increase in Japanese stimulus.

Gold, Yen Primed for USD Volatility around Jackson Hole

Created with Marketscope/Trading Station II; prepared by James Stanley

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

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USDOLLAR Index Looks to CPI, FOMC Minutes to Break Range

News events, market reactions, and macro trends.

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Talking Points:

- USD/CAD breakdown forewarns of US Dollar weakness.

- EUR/USD remains biased higher, USD/JPY lower in near-term.

- August is typically a bad month for risk and a good month for the US Dollar - see the August forex seasonality report.

The ides of August are upon us, meaning we've gotten through the 'dog days of summer.' Yet while the lack of volatility in markets may be forgotten now as market participants decamp for holiday, it is likely to linger nonetheless barring explicit catalysts. Fortunately for those market participants still around, the next two days brings about significant event risk from the United States, in the form of the July Consumer Price Index and the July FOMC minutes.

Absent economic drivers, it seems very likely that the US Dollar (via the USDOLLAR Index) will remain rangebound ahead of the Jackson Hole Economic Policy Symposium, in particular, Fed Chair Janet Yellen's heralded speech on Friday, August 26.

Given the backdrop of a weak Q2'16 US GDP report, softening expectations for Q3'16 US GDP (the Atlanta Fed's GDPNow growth forecast is down to +3.5% from +3.8% over the past two weeks), and the contentious US presidential election cycle, it seems highly unlikely that the Fed will be raising rates in September. Putting this view in context of individual components of the USDOLLAR Index - EUR/USD and USD/JPY in particular - and there stands good reason to sell US Dollar rallies over the next few weeks.

See the video (above) for technical considerations in EUR/USD, GBP/USD, USD/CAD, AUD/USD, USD/JPY, and the USDOLLAR Index.

Read more: Will US Data Help USDOLLAR Shake Off Weekly Doji?

--- Written by Christopher Vecchio, Currency Strategist

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

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US Dollar May Rise Amid Pre-Positioning for Yellen Speech

Fundamental analysis, economic and market themes

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Talking Points:

  • US Dollar seesaws upward amid pre-positioning for Yellen speech
  • NZ Dollar down as disappointing trade data weighs on RBNZ bets
  • Euro may not find lasting momentum in 2Q German GDP revision

The US Dollar corrected higher in overnight trade having traded broadly lower in the prior session. Seesaw price action since the beginning of the week seems to reflect pre-positioning ahead of a much-anticipated speech from Fed Chair Janet Yellen at the Jackson Hole Symposium on Friday.

A shift in priced-in policy bets implied in Fed Funds futures hints investors are leaning toward a hawkish outcome, hinting the greenback may find fuel for greater gains as the end of the week draws closer. The probability of a rate hike in December now stands at 53.9 percent compared 51 percent last week and 45.1 percent a month ago.

The New Zealand Dollar narrowly underperformed. The currency edged lower alongside front-end bond yields, hinting at a modest up-shift in RBNZ rate cut bets as the catalyst behind the decline. The move appeared to follow a disappointing Trade Balance report. The 12-month year-to-date deficit registered at –NZ$3.03 million versus –NZ$2.9 million expected.

Looking ahead, a revised set of second-quarter German GDP figures headlines an otherwise quiet European data docket. The release is expected to confirm the Eurozone’s largest economy added 0.4 percent in the three months through June. The figures will not capture the cooling effect of the “Brexit” referendum outcome and so seem unlikely to generate a lasting reaction from the Euro.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Trade Balance (JUL)

-433m

-325m

110m

22:45

NZD

Exports (JUL)

3.96b

4.07b

4.25b

22:45

NZD

Imports (JUL)

4.40b

4.45b

4.14b

22:45

NZD

Trade Balance 12 Mth YTD (JUL)

-3034m

-2900m

-3331m

01:00

AUD

Skilled Vacancies MoM (JUL)

-0.6%

-

0.8%

01:30

AUD

Construction Work Done (2Q)

-3.7%

-2.0%

-2.6%

05:00

JPY

Leading Index CI (JUN F)

-

-

98.4

05:00

JPY

Coincident Index (JUN F)

-

-

110.5

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

06:00

EUR

German Private Consumption (QoQ) (2Q)

0.2%

0.4%

Low

06:00

EUR

German Government Spending (QoQ) (2Q)

0.5%

0.5%

Low

06:00

EUR

German Capital Investment (QoQ) (2Q)

-1.3%

1.8%

Low

06:00

EUR

German Construction Investment (QoQ) (2Q)

-2.8%

2.3%

Low

06:00

EUR

German Domestic Demand (QoQ) (2Q)

-0.1%

0.8%

Low

06:00

EUR

German Exports (QoQ) (2Q)

0.7%

1.0%

Low

06:00

EUR

German Imports (QoQ) (2Q)

-0.3%

1.4%

Low

06:00

EUR

German GDP s.a. (QoQ) (2Q F)

0.4%

0.4%

Medium

06:00

EUR

German GDP w.d.a. (YoY) (2Q F)

1.8%

1.8%

Medium

06:00

EUR

German GDP n.s.a. (YoY) (2Q F)

3.1%

3.1%

Medium

08:30

GBP

BBA Loans for House Purchase (JUL)

38000

40103

Low

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.1217

1.1269

1.1287

1.1321

1.1339

1.1373

1.1425

GBP/USD

1.3015

1.3097

1.3148

1.3179

1.3230

1.3261

1.3343

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

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