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Dollar, Yen and GBP: Three Price Action Themes for This Week

Dollar, Yen and GBP: Three Price Action Themes for This Week

Talking Points:

- A vitally-pertinent theme for Financial Markets moves into the spotlight this week with the December FOMC meeting. A 25 basis point hike at this meeting is largely assumed; but more pressing will likely be how aggressive the bank may be looking to hike in 2017.

- Also of issue is the continuation of Yen-weakness along with the recent rise of British Pound-strength. With British inflation numbers to be released on Tuesday and a Bank of England meeting on Thursday, we’ll likely see considerable attention around GBP.

- If you’re looking for trading ideas, check out our Trading Guides.

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This is another week loaded with potential drivers for global markets. We hear from four major Central Banks, and we’ll see another major theme come to question with the release of British inflation numbers tomorrow. If you’d like a quick preview of the top three events for this week, we looked at that on Friday. For today’s article, we’re going to look at three of the most pressing price action themes for global markets as we head into this heavy week of data.

Dollar Strength

This is rather obvious and it’s been a pertinent driver in markets since the brisk-reversal posed in the Greenback on the night of the elections. What was first aggressive weakness in the U.S. Dollar, likely driven by the uncertainty of a Donald Trump presidency, turned into scalding strength that’s continued pushing the U.S. Dollar-higher for the better part of the past month.

Chart prepared by James Stanley

This will be directly in the spotlight on Wednesday for the Federal Reserve’s December meeting. At this upcoming rate decision, a 25 basis point hike is largely assumed as a given, and this doesn’t even really appear to be up-for-debate. The bigger question is how many hikes the bank might be looking for in 2017 with their larger goal of ‘policy normalization.’

At the last Fed meeting in December, the bank hiked rates for the first time in over nine years. But when doing so – they also said that they were looking to hike a full four times in 2016; and for an environment that just saw considerable discord throughout 2015 as the bank tried to stage a single 25 basis point hike, this degree of ‘hawkishness’ for future rate policy seemed a bit out-of-place. Within two weeks of that rate hike and markets had already begun to collapse. And six weeks after that, Janet Yellen staged a rather pronounced pivot of dovishness at her twice-annual Humphrey Hawkins testimony; and this brought expectations for near-term rate hikes out of the Fed significantly-lower.

So, much like we saw in 2015, much of the year was spent debating the merit of a single 25 basis point hike. And also like 2015, now that we’re finally in the final month of the year and equity markets are remaining frothy, a hike at the Fed’s next meeting seems a near-certainty.

The big question now is whether the Fed gets carried away with all of this optimism when setting near-term expectations for rate moves in 2017 and 2018; as they did last December.

Chart prepared by James Stanley

Yen Weakness

Another theme that’s become rather pronounced after U.S. elections has been the continuation of Yen-weakness. USD/JPY is up by +14.48% since the election night lows, and while we’ve seen a few cases of short-term resistance showing-up in the pair, each bout of resistance has been met by more-and-more buyers.

Given the veracity of the past month’s run, traders may be well-served by waiting for some element of resistance to show in order to let prices come-down in the effort of buying the next ‘higher low’ in the pair. We discussed such a strategy two weeks ago in the article, Yen: How to Work With the Trend that Barely Bends (JPY).

Such a resistance level may be coming into play on the morning here in USD/JPY, as the 2015 swing-low in USD/JPY is currently showing-up as near-term resistance. USD/JPY caught multiple iterations of support off of the 116.00 level last year. This year, this support level didn’t become broken until after the Bank of Japan made the surprising move to negative rates; at which point concerns were being raised that the Bank may be more-desperate than previously-thought if they were going to do something as radical as enact negative rates.

Chart prepared by James Stanley

But after that surprising move to negative rates, the Japanese Yen strengthened mightily and continued to run for months until the ¥100.00-level came back-into play on the pair. And it took the better part of three months of support holding until bulls could finally re-take control of the situation, as driven by the ‘reflation trade’ around U.S. Presidential elections.

Now that ¥116.00 is coming back into play in USD/JPY, this can be a novel area for traders to take profits on prior long positions, and this could produce a pull-back type of scenario that could lead to the next ‘higher-low’ level of support. On the chart below, we’re looking at a potential area to watch for ‘higher-low’ support to develop in USD/JPY, using an approximate 40-pip zone around the ¥115.00-level in the pair.

Chart prepared by James Stanley

British Pound Strength – Will Inflation (Continue to) Pave the Way?

Probably one of the more surprising events from the month of November was the strength seen in the British Pound. After spending months as one of the weakest currencies in the world, the British Pound stages a brisk-turnaround to rival the U.S. Dollar as one of the world’s strongest in the month of November.

Chart prepared by James Stanley

But this had little to do with the election, as this was more-driven by the Bank of England’s pivot on inflation expectations. After Brexit, the Bank of England transmitted significant-dovishness as they triggered a ‘bazooka’ of QE while saying that monetary policy would remain as especially accommodative in the near-term. This led to a perfect storm of bearishness on GBP as the extreme uncertainty of Brexit was coupled with the extreme-dovishness from the Bank of England and there were really very few reasons to want to buy Sterling.

But it’s just when most of the world is looking for the same thing that something completely different happens; and as we were warning, the ‘sharp repricing’ in the value of the British Pound around Brexit was likely going to lead to inflationary pressure in the U.K. economy and, eventually, the Bank of England was going to have to take notice of this fact.

This happened in early November at the BoE’s Super Thursday batch of announcements, at which point GBP/USD broke above its prior swing-high at 1.2325, and then spent most of November putting in bullish price action. And while the U.S. Dollar spent much of November staging a rampage of higher-prices, the British Pound remained a tick-stronger.

Tomorrow we get British inflation numbers for the month of November, and should this print above the expectation for 1.1% annualized growth, with 1.3% in core inflation (annualized) – the British Pound could continue to strengthen-higher.

Later in the week we hear from the Bank of England. There is scant expectation for any actual moves, and we have to wait until February for updated inflation forecasts. So the bigger driver here is likely going to be Mark Carney’s comments regarding how the bank might look to handle ‘inflation overshoots’ in the future. Or, to put it more simply, what is the bank going to do if inflation comes-in even higher than the more-aggressive inflation forecasts in the coming periods?

We outlined the near-term setup in Cable last week in the article, Constructively Bullish.

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for

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