Talking Points:
- GBP/USD remains in its two-month descending channel as UK PM May looks to weather the recent resignations from her cabinet.
- EUR/USD triangle since mid-May has failed to yield a break to the topside, giving the DXY Index room to recover.
- Sentiment for the US Dollar continues to suggest a neutral outlook after recent price developments.
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The US Dollar (via the DXY Index) is advancing for the second consecutive day as traders continue to watch the dust settle after the US-China trade war took a leap forward over the weekend with the imposition of long-threatened tariffs. And while a trade war may not be beneficial for the US Dollar long-term, in the near-term, market participants are likely waiting to see if 'this is it' in terms of escalating tensions, or if there's more still to come.
Accordingly, with traders approaching the US Dollar in a wait-and-see mode, other currencies have been given breathing room to exert their own influences on the market. The weakest German ZEW Survey readings since 2012 has kneecapped EUR/USD, which is declining for the first time in four sessions.
The surprise miss comes after several weeks of Eurozone data outperforming: the Citi Economic Surprise Index for the Eurozone, which was at a near-seven year when it was -100.1 on June 8, rebounded to -36.1 by the end of last week. As such, EUR/USD's triangle since mid-May has failed to yield a break to the topside.
In fact, with the EUR/USD triangle still intact, a potential short-term topping pattern has started to emerge and is worth watching develop through the end of the session: a evening doji star candle cluster.
Mirroring the near-term morning doji star candle cluster forming in the DXY Index, such developments suggest that EUR/USD weakness could prevail into the second half of the week. Given that the Euro is 57.6% of the DXY Index, any weakness seen by the single European currency would help the DXY carve out a short-term bottom as well.
Elsewhere, following the surprise resignations of David Davis and Boris Johnson, UK Prime Minister Theresa May's government appeared to be in a state of upheaval. But as the May government looks like it will survive, the key question has become 'will the UK pivot towards a hard Brexit?' GBP/USD attempt to climb out of its descending channel since mid-May now seemingly hinges on the market's answer to this very question.
See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/CNH, and Gold.
Read more: FX Week Ahead: Chinese CPI, Bank of Canada Rate Decision, US CPI
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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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