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USDOLLAR Index Supported, but USD/JPY Diverges after False Breakout

USDOLLAR Index Supported, but USD/JPY Diverges after False Breakout

Christopher Vecchio, CFA,

Talking Points:

- EURUSD should be swayed by US and EZ inflation data this week.

- USDJPY triangle false break higher is a warning sign for risk.

- See the September forex seasonality report.

The end of Q3'15 and the beginning of Q4'15 this week will usher in a great deal more event risk as well. Whereas there were only two "high" rated events on the DailyFX economic calendar last week, there are at least seven unique "high" events this week (13 altogether) that are primed to bring volatility to FX markets.

While the Federal Reserve is keeping its ZIRP policy in place, many feel that the labor half of its monetary policy mandate has been met; achieving its inflation target has thus far failed. Similarly, the European Central Bank ackowledged that its policies aren't boosting inflation in the manner they hoped, with the Governing Council revising the central bank's growth and inflation forecasts lower back in early-September.

These overarching themes puts focus on data in the first half of this week. The Fed's preferred gauge of inflation, the PCE Core, will be released today at 12:30 GMT. The German CPI will be released tomorrow, and Euro-Zone CPI figures will be released on Wednesday. These reports are important in context, of course: both the Euro and the US Dollar have strengthened in recent months against their major counterparts (particularly higher yielding or commodity bloc currencies), which are inherently deflationary pressures. Likewise, energy prices have resumed their decline (although we're approaching last year's Q4 slide, which means base effects will wear off).

Even if some or all of the data over the coming days prove to be insufficient as catalysts to nudge either the Fed or the ECB into a more definitive policy stance, they will at least help clarify what is an opaque picture (to wit: as the Fed has stressed transparency, its explanations about policy have become longer and more convoluted).

To this end, we'll be looking for the big tell among FX pairs to come from USDJPY this week. On September 25, USDJPY made an attempt to breakout higher from its triangular consolidation that's formed the past month, but as of this morning, had failed in its attempt and was trading squarely in the middle of the triangle around ¥120.00. Typically, a breakout that fails (one that leaves the consolidation only to return quickly) often sees a reversal deeper within the consolidation, returning to the prior extreme. If this is the case for USDJPY, support near ¥119.30/40 would come into focus immediately before the triangle base at ¥118.20/25. If this happens, equity markets could lose ground rather quickly.

See the above video for technical considerations in EURUSD, USDCAD, AUDUSD, AUDNZD, GBPNZD, and the USDOLLAR Index.

Read more: Major Euro Influences to Come from Within, Less Likely from Abroad

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.