Daily Briefing

US Dollar Shows Strength Ahead of ECB, BoJ Rate Decisions

Price action and Macro.

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Talking Points:

- The US Dollar is perking up ahead of this week’s close, and next week brings rate decisions from both the European Central Bank and the Bank of Japan. Both economies have seen a pullback with inflation of recent, and this may open the door for a dovish outlay at each of those rate decisions. Deductively, this opens the door for USD-strength to test March/Q1 highs around 90.50, 90.84 or 91.01 on DXY.

- Japanese inflation fell in March, and the theme of Yen-strength that began to show in Q1 has further dissipated. This may help to bring back the previously attractive theme of Yen-weakness, which could make the topside of setups such as EUR/JPY or GBP/JPY attractive on a longer-term basis.

- DailyFX Forecasts have been updated for Q2, and 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.

European Central Bank (ECB), Bank of Japan (BoJ) Highlight Next Week’s Calendar

It’s been an interesting week across global markets, as earlier-week breakouts in both the British Pound and US equities were unable to hold, and we’ve already seen reversals to varying degrees in each of those markets. Last night’s Japanese inflation came-in at 1.1%, cooling from the 1.5% from last month and removing a bit of pressure from that theme of Yen strength that began to show in Q1. This opens the door to the possibility of a continuation of Yen weakness as we work deeper into Q2, and as we move into next week that theme will be in the spotlight as we get a Bank of Japan interest rate decision on Thursday/Friday of next week.

Before we get to that rate decision, we have another item of interest in the ECB’s April rate decision set for Thursday morning. Next week’s calendar is back-loaded with these two rate moves in the latter-portion of the week:

DailyFX Economic Calendar: High-Impact Items for Week of April 23, 2018

DailyFX Economic Calendar High Impact Items for Week of April 23

US Dollar Moves Back Above 90.00: Bullish Breakout Potential For Next Week

The US Dollar has been weak. This much is known. And this weakness has happened in a backdrop where monetary policy would generally dictate otherwise, as rates have been rising in the US without much tightening elsewhere. We did get the rate hike out of the UK in November, and we may get another in May, but outside of that, there has been a dearth of rate hikes out of large Central Banks not named the Federal Reserve.

This alludes to the fact that something else has been doing the driving here, and we’ve discussed the likely culprit of fiscal policy in the past. And while that theme may continue on a longer-term basis, we may be nearing an area where a retracement in that built-in down-trend in the US Dollar might be ready to take a break. DXY has not made a fresh low for more than two months, and that happened after support showed at a key Fibonacci retracement. This lack of further lows may be helping to highlight a greater degree of probability for a bullish short-term move in USD.

US Dollar Daily Chart: Two Months Since Print of Fresh Low

us dollar daily chart

Next week brings rate decisions out of both the ECB and BoJ. Both of these banks could benefit from a weaker currency, and each is or has been trying to stave off calls from market participants to start moving away from uber-loose monetary policy. As inflation was rising in each economy, in Europe through last year and more recently in Japan; those calls were difficult to shrug off, and market participants were buying these currencies on the growing expectation that the ECB and BoJ would be forced into action and away from emergency levels of monetary accommodation.

But more recently, inflation has been softening in both Japan and Europe. Last night gave us March inflation data out of Japan at 1.1%, and last month Europe saw 1.4%. This opens the door for dovish outlays at those Central Bank for next week’s rate decisions, which could allow for additional weakness to flow into each of the Euro and the Japanese Yen as pressure is removed. Deductively, this could allow for a deeper move of strength in the US Dollar, testing resistance areas from earlier in the year around 90.50, 90.84, or even the 2017 swing-low at 91.01.

US Dollar via ‘DXY’ Four-Hour Chart: Wednesday

us dollar four hour chart

EUR/USD: Back to 1.2300 Support

EUR/USD continues to trade within a range that’s become increasingly messy. A bit of support is continuing to show around the 1.2300 handle, and this is the same area that helped to catch the lows last week. As we move into next week, the areas of interest are around 1.2337 and 1.2167, as each helped to play a role in supporting price action in the month of March. The level of 1.2167 could be particularly interesting if we do see a sell-off down to support, as this is a Fibonacci level that’s brought on an active support response in both mid-January and early-March.

EUR/USD Four-Hour Chart: Two-Month Range Narrows into a Wedge Pattern

eurusd four hour chart

USD/JPY Continues in Bullish Channel After Japanese Inflation

We looked at the trend shift in USD/JPY from Q1 to Q2 in yesterday’s article, and that theme remains alive as we move towards the BoJ’s rate decision on Thursday night/Friday morning of next week. The big item of interest here is at 107.90. This was a swing-high from late-February, and at this point that price constitutes the two-month high in the pair. As we’ve seen bullish price action return to USD/JPY, buyers have continued to provide support at higher-lows; but, to date, that bullish enthusiasm has waned as we’ve moved towards tests of prior highs. If we do see this high taken out, the possibility of bullish continuation will look considerably more attractive in USD/JPY.

USD/JPY Four-Hour Chart: Shift into Bullish Channel in Q2 Brings Continuation Potential

usdjpy four hour chart

GBP/USD: Reversal of Fortune After Carney, UK Inflation

The British Pound has been the big mover this week, continuing a bullish breakout in the early-portion followed by an aggressive reversal after Wednesday morning. That, of course, is when we got inflation numbers out of the UK for the month of March, and that data was not very positive as inflation fell for the second consecutive month. But – inflation does remain well-above the BoE’s 2% target, so there remains strong odds of getting a hike at the May ‘Super Thursday’ rate decision in a couple of weeks.

More pressing, however, is the BoE’s tolerance for the rest of the year, and this was spoken to by the head of the bank, Mr. Mark Carney, in a speech yesterday. Mark Carney’s speech was the cherry on top for Sterling bears, as he took a dovish tone that helped to further that reversal.

At this point, GBP/USD is testing the mid-line of the bullish channel that’s been in force for over a year now, and we’re getting closer to the 1.4000 psychological level. This brings to question the viability of that bullish trend as we move into next week.

GBP/USD Daily Chart: Cable Crumbles After Fresh Post-Brexit Highs

gbpusd daily chart

NZD/USD For USD-Strength Scenarios

On Wednesday of this week we looked at a short-side setup in NZD/USD, and if US Dollar strength is a theme that might continue, this pair remains an attractive venue. The longer-term setup in the pair is a range, and this range has been alive for almost two years now. Prices have spent around a week in the resistance side of this range, and as USD began to show strength, short-term price action has moved-lower. This opens the door for bearish continuation in NZD/USD, and the next big item of interest for support is around the .7000 psychological level.

NZD/USD Hourly Chart: Kiwi Breakdown Carries Continuation Potential

nzdusd hourly 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.

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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

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GBP/USD Falls Back to Trend Support from November

News events, market reactions, and macro trends.

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Talking Points:

- The British Pound slumped hard late in yesterday's session following comments by BOE Governor Mark Carney.

- The BOE chief's remarks saw May rate hike odds from from near 85% to 52%.

- Sentiment for the British Pound is now neutral.

For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.

The US Dollar (via the DXY Index) has extended its run of gains this week, on pace for its fourth consecutive day in the black amid a rise in US Treasury yields. USD/JPY continues to push higher despite US equity markets stalling, while EUR/USD has slipped back to trendline support dating to April 2017, the pivot lows seen before the first round of the French elections.

But the biggest mover over the past 24-hours has been the British Pound. Following Bank of England Governor Mark Carney's comments yesterday, overnight index swaps' implied probability of a rate hike next month dropped from near 85% to below 50% yesterday.

The BOE chief noted that there has been weakness in some recent data, all of which has come across the wires in the past week: the bevy of price data - CPI, PPI, and RPI - all came in softer than anticipated; despite the unemployment rate remaining at multi-decade lows, jobs growth and wage growth are uneven; and retail sales figures missed expectations.

What was once seen as a sure thing is now being drawn into question. Fellow BOE policymaker Michael Saunders' remarks earlier today has helped stabilize rate expectations, with OIS now pricing in a 52% chance of a move in May.

Price Chart 1: GBP/USD Daily Timeframe (August 2017 to April 2018)

GBP/USD Falls Back to Trend Support from November

After completing the upside measured move in the bullish falling wedge earlier this week, GBP/USD has now fallen back to key uptrend support, both the ascending channel in place since the March 1 low as well as trendline support dating back to the November 2017 low.

For now, the weakness seen in the GBP-complex may just be nervous longs taking profit amid the injection of uncertainty over the near-term rate path. According to the CFTC's COT report for the week ended April 10, speculators were long to the tune of +8K net-long contracts. Unfortunately, when the update to the COT figures are released later today, the decline seen over the past 24-hours won't be reflected: they cover the period ended through April 17.

If GBP/USD is truly topping here, then a move below the April 5/6 swing low near 1.3975 will have to give way. Otherwise, given that the composition of voters appears set for either a 6-3 or a 5-4 vote in favor of a rate hike in May, it would reason that buying weakness in the British Pound ahead of the May policy meeting remains an opportunity for traders who had missed upside over the past few months.

Read more: DXY Index Carving Out Inside Day, Lighter Calendar Ahead

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

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US Dollar May Add to Gains as Fed Rate Hike Outlook Firms

Fundamental analysis, economic and market themes

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TALKING POINTS – AUSSIE & NZ DOLLARS, ASIA STOCKS, FED RATES OUTLOOK

  • Aussie, NZ Dollars follow AsiaPac stocks lower on Fed rate hike fears
  • Pound down on cautious Carney comments, Yen digesting earlier rise
  • Hawkish remarks from Fed’s Evans may continue US Dollar recovery

Asia Pacific markets picked up on a negative lead from Wall Street, where worries about Fed rate hike acceleration weighed on risk appetite. Regional shares shed nearly 1 percent on average, with losses tracked by the sentiment-linked Australian and New Zealand Dollars.

The typically anti-risk Japanese Yen put in a mixed performance as prices digested yesterday’s gains. The US Dollar continued to advance having been emboldened by a steepening of the priced-in 2019 tightening path and the largest jump in the spread between 10- and 2-year Treasury bond yields in two months.

Rate hike bets swelled after usually dovish Fed Governor Lael Brainard offered an ominous speech warning of looming “cyclical pressures” – seemingly a byword for inflation – and worried aloud about stretched asset prices and business leverage levels. Price rise signals in the Philly Fed survey also helped.

The British Pound continued to lose ground having suffered outsized losses yesterday after BOE Governor Mark Carney cooled near-term rate hike bets. He said a few hikes are likely in the coming years but seemingly downplayed the likelihood of a May increase, which markets assign a 70 percent probability.

Looking ahead, a quiet European data docket is likely to keep Fed-speak in focus. Comments from Chicago Fed President Charles Evans – another dove – are on tap. If he follow’s Governor Brainard’s hawkish pivot, a repeat of yesterday’s price dynamics may be in store.

See our quarterly FX market forecasts to learn what will drive prices through mid-year!

Asia Pacific Trading Session

US Dollar May Add to Gains as Fed Rate Hike Outlook Firms

European Trading Session

US Dollar May Add to Gains as Fed Rate Hike Outlook Firms

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

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

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