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Price Action Preview: Another Week for the Central Banks

Price Action, Swing & Short Term Trade Setups

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Talking Point:

- This week is brisk on the data front, with high-impact announcements for each day of the week after Monday. The highlights will likely be Central Banks, with FOMC on Wednesday, BOJ on Friday and ECB Stress-Tests later on Friday.

- The U.S. Dollar continues in its bullish pattern and Oil prices have continued to show softness. This may cause the Fed to temper hawkishness this week, but with stock prices nearing all-time highs, the bank will likely avoid inserting any additional dovishness. Attention will probably be quickly averted to the next Fed meeting in September.

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This week is chocked full of economic data reports, but the highlights will likely be derived from the news taking place around three major Central Bank announcements. On Wednesday, we hear from the Federal Reserve and on Friday morning, we hear from the BOJ with over 75% of analysts-polled expecting an expansion of the bank’s bond buying program. And later on Friday morning we get the results of the ECB’s most recent stress-tests on European banks, and with the huge amount of focus going into the health of European banks of recent, particularly in Italy, these stress-tests could be market moving.

And outside of these three events, there are high importance announcements for each day of the week after Monday with U.S. Consumer Confidence on Tuesday morning with Australian CPI later on Tuesday evening (Wednesday morning in Australia), British GDP on Wednesday morning, German Employment Numbers and inflation on Thursday morning, and Euro-Zone GDP on Friday morning.

In this article, we’re going to look at three of the more interesting themes in global markets as we approach this bevy of data points, focusing on areas that are primed for volatility around this week’s economic calendar.

High-Importance Announcements on the DailyFX Economic Calendar for the Week of July 25th, 2016

Price Action Preview: Another Week for the Central Banks

Data derived from DailyFX Economic Calendar; prepared by James Stanley

USD Strength And Will the Fed Go Hawkish?

We discussed this theme at length last week just after the U.S. Dollar posed another bullish breakout. In the article entitled, Will the Fed Feedback Loop See the Bank Take Another Hawkish Tilt, we encountered the premise of the Federal Reserve modifying outlook for rate moves based on stock prices. As stock prices surge, the Fed has shown a tendency to get hawkish and talk up rate hikes; while stock prices sagging have brought on dovishness and passivity towards rate hikes. We’ve already seen a few iterations of this theme over the past year, and with the S&P 500 back up to fresh all-time highs, the opportunity is there for the Fed to talk up rate hikes, again.

To be sure, there is little expectation for any actual rate moves on Wednesday. The likely drivers will be in the details; whether the Fed mentions strength in the labor markets (hawkish) or whether they’re in a ‘wait-and-see approach’ (dovish).

If the Fed does go hawkish, we’ll likely see a continuation of the recent top-side breakout. The Fed is likely well-aware of this recent bullish move in the greenback and in the past have mentioned the risk of a strong-USD becoming a headwind to growth. And given the fact that many other Central Banks have been rather open with their dovishness, with the BOE mentioning the probability of upcoming rate cuts while Japan is expected to increase their bond buying program, the Fed is likely looking at a future in which capital flows are streaming into the US Dollar; so even if the Fed does want to take a hawkish stance, they may not be very implicit about it, instead drawing attention towards their next meeting in September.

Price Action Preview: Another Week for the Central Banks

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

Will the BOJ Increase Stimulus Now or Later?

The past couple of weeks have seen quite the change-of-pace for Japanese markets, as a win by Shinzo Abe’s coalition in the upper-house of Japanese Parliament has offered a super-majority that should enable the passing of constitutional reforms for the country, while also lessening political resistance that Abe may face when embarking on new and larger stimulus programs. After those elections, we’ve seen global markets continuing to sell the Yen while bidding Japanese stocks higher, giving the apparent expectation that markets are attempting to front-run the next announcement of Japanese stimulus.

The big question, at this point, is whether we hear of that announcement now or later in the year. After past BOJ actions of buying stocks with QE and then moving to negative rates have seemingly blown-up on the bank, it might make sense to wait to make that next announcement of monetary stimulus. Also, one must take into account the BOJ’s penchant for surprises, and with over 75% of analysts being polled expecting an increase at this meeting, we may see Kuroda take a back seat, temporarily, to see what Abe’s coalition might have to offer on the fiscal stimulus front.

So while more BOJ accommodation is likely on the way, it may not be until their next meeting in September, just ahead of the next Federal Reserve meeting on September 21st.

Price Action Preview: Another Week for the Central Banks

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

Is Oil Going to Become a Concern Again?

One of the most threatening aspects of the price action in the early portion of the year was the declines being seen in Oil prices. And with the increased exposure to Oil prices in the American economy on the back of the ‘shale revolution,’ sagging energy prices brought upon fresh risks for U.S. and European banks. And while many questioned the correlation between stock prices and oil prices at the time, the likely pain factor could be drawn back to banks. As rates stayed at record-lows, investors had to search far-and-wide to get yield. As oil prices had stayed in a relatively stable up-trend, driving investment towards Oil and energy extraction seemed to be a sound strategy. But eventually, the world was awash in Oil and prices declined massively. And as those declines came-in and as extractors felt the pinch to their margins, the exposure that banks had taken on to lend money to such outfits became a threatening concern. We discussed this in the article, US Oil and the Velocity of Contraction: The Looming Boom of Energy Debt.

Disaster was averted in Q1 as Oil prices staged a dramatic resurgence after Chair Yellen’s Congressional testimony on February 11th; and that strength has continued all the way into mid-June. But more recently, Oil prices have been dropping again. The monthly chart, as of right now, is showing an evening star bearish reversal pattern (not yet confirmed until the end of the month). Also of note, we’re less than $1 away from a critical support level at $42.66. This is the 76.4% retracement (23.6% remaining) of the ‘big picture move’ in Oil prices, taking the low from the year 1999 to the highs in 2008. This level had provided the price action swing-low during the Financial Collapse.

Price Action Preview: Another Week for the Central Banks

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

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

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USD/JPY, GBP/JPY Reversals Gather Pace as Scope for Japanese Stimulus Fades

News events, market reactions, and macro trends.

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Talking Points:

- Japanese fiscal stimulus program is much smaller than anticipated (¥6 trillion versus ¥10 trillion).

- Lack of significant Japanese fiscal policy program reduces likely of major, effective BOJ easing on Friday.

- As market volatility stays elevated post-Brexit, it's a good time to review risk management principles.

The Japanese Yen has made a sharp reversal the past 24-hours as investors have succumbed to reality: hopes for a major, 'fix all' set of stimulus measures won't be coming down the pipeline. With rumors swirling about a potential ¥10 trillion fiscal stimulus program, the multi-year, ¥6 trillion program set to be announced (per the Nikkei financial daily earlier today) is clearly short of expectations.

Concurrently, with fiscal policymakers seemingly falling short of what was admittedly a high hurdle, the scope of expansive stimulus from the Bank of Japan seems to have dwindled as well. Put plainly, whatever the BOJ does will have little impact unless the measures are amplified by a concurrent fiscal policy response; we know the fiscal policy response isn't coming. Logically then, it would behoove the BOJ to wait to use all of its ammunition now when it may not be the most ample time.

This story sounds familiar, no? The Federal Reserve faces the same issue: years of fiscal policy stagnation means any new easing the Fed does will have little impact in the areas of the economy that have thus yet to recover from the GFC. Think of it this way, as if the economy were a car: fiscal policy is the engine; monetary policy is the oil that slicks the gears. If the engine is turned off, or isn't set up to run properly, then it doesn't matter how much lubricant you apply - the car won't run.

Between the Fed and the BOJ, now that the bar for BOJ disappointment has been lowered within reach, expect more significant volatility out of JPY-crosses through the rest of the week (more so than estimated coming into this week).

Read more: USD/CAD Breakout Potential Persists as Crude Oil Breaks Down

--- Written by Christopher Vecchio, Currency Strategist

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

Follow him on Twitter at @CVecchioFX

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Euro, Pound May Fall as Yen Gains on Post-Brexit PMI Data

Fundamental analysis, economic and market themes

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Talking Points:

  • UK and Eurozone PMI surveys to offer glimpse of post-Brexit slump
  • Euro, Pound to fall if data boosts ECB, BOE stimulus expansion bets
  • Japanese Yen likely to rise if PMIs trigger market-wide risk aversion

The Brexit referendum has come and gone without validating fears that a vote to leave the EU will trigger an instant market-wide crisis. A measure of overall UK financial conditions from Bloomberg that plunged to a four-month low in the immediate aftermath of the vote – stoking credit crisis fears – has since rebounded to the highest level since December 2015.

The spotlight now turns to evaluating the longer-term growth implications of uncertainty about what the EU/UK divorce entails. Firms and individuals are likely to delay spending and investment plans to wait for a clearer picture to emerge. This seems all but certain to trigger a significant slowdown on both sides of the English Channel.

Traders will get an initial glimpse of what this may look like as July’s flash PMI surveys cross the wires. UK manufacturing- and service-sector activity is expected to contract for the first time in at least three years. Meanwhile, analogous figures for the Eurozone are projected to show the most sluggish expansion since December 2014.

The markets are surely primed for a downturn already so it is the degree of weakness that will matter. Data pointing to a steeper slump than expected is likely to weigh on the Euro and the British Pound amid growing ECB and BOE stimulus expansion bets. It may also undermine broader market sentiment, boosting the anti-risk Japanese Yen. Needless to say, the opposite dynamic will probably follow upbeat results.

What is the most common mistake that traders make? Find out here!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

01:45

CNY

MNI Business Indicator (JUL)

55.5

-

54.5

02:00

JPY

Nikkei Japan PMI Mfg (JUL P)

49.0

-

48.1

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

07:00

EUR

Markit France Mfg PMI (JUL P)

48.0

48.3

Medium

07:00

EUR

Markit France Services PMI (JUL P)

49.5

49.9

Medium

07:00

EUR

Markit France Composite PMI (JUL P)

49.2

49.6

Medium

07:30

EUR

Markit/BME Germany Mfg PMI (JUL P)

53.4

54.5

High

07:30

EUR

Markit Germany Services PMI (JUL P)

53.2

53.7

High

07:30

EUR

Markit/BME Germany Composite PMI (JUL P)

53.6

54.4

High

08:00

EUR

ECB Survey of Professional Forecasters

-

-

Medium

08:00

EUR

Markit Eurozone Mfg PMI (JUL P)

52.0

52.8

High

08:00

EUR

Markit Eurozone Services PMI (JUL P)

52.3

52.8

High

08:00

EUR

Markit Eurozone Composite PMI (JUL P)

52.5

53.1

High

08:30

GBP

Markit UK PMI Mfg SA (JUL P)

48.7

52.1

High

08:30

GBP

Markit/CIPS UK Services PMI (JUL P)

48.8

52.3

High

08:30

GBP

Markit/CIPS UK Composite PMI (JUL P)

49.0

52.4

High

09:00

EUR

Euro Area First Quarter Government Debt

-

-

Low

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EURUSD

1.0862

1.0942

1.0984

1.1022

1.1064

1.1102

1.1182

GBPUSD

1.2983

1.3102

1.3168

1.3221

1.3287

1.3340

1.3459

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

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Contact and follow Ilya on Twitter: @IlyaSpivak




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