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PM May, BoC, U.S. and U.K Inflation to Headline Next Week

PM May, BoC, U.S. and U.K Inflation to Headline Next Week

2017-01-13 14:26:00
James Stanley, Strategist
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Talking points:

- While this week was low on data volatility continued as we saw deeper retracements develop in the previously strong theme of bullish-USD.

- Next week sees a bit more circulation on the data front, with Tuesday, Wednesday and Thursday all bringing workable data points to markets. For Sterling-traders, be very careful on Tuesday as we hear from PM May on the expected ‘Brexit speech’ while also getting U.K. inflation numbers for December.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).

Will the Dollar Find Support?

One of the more noteworthy items from markets this week was the continued retracement in the U.S. Dollar. This, of course, was one of the biggest movers after the U.S. Presidential election, and this stayed as such through the Fed’s rate hike in December. But since the week after that rate hike, the Greenback has lacked motivation to driver to further highs. This can be resultant from a few different factors, key of which is the fact that USD had become so incredibly overbought in the post-Election environment; and when the Fed finally did kick-up that second rate hike in the past 10 years, they didn’t go as hawkish as they could have and certainly less-so than last year.

But the backdrop that drove the Dollar higher throughout November and into December is still relatively the same. The U.S. is one of the few major, developed economies that is actually looking at higher rates. Economies in Europe, Japan, the U.K. and many parts of Asia are all being supported with dovish policy options and, for the most part, there is no end in sight.

So, the bigger question then becomes – when will the U.S. Dollar find support in order to continue this recently-fired up-trend? On the chart below, we’re looking at two potential zones that traders can watch for support to form in the U.S. Dollar (via DXY). Each of these levels come from the Fibonacci retracement around the post-Election move, taking the low from election night up to the high set just last week. Current price action is attempting to form support around the 38.2% retracement of that move; but a bit lower is a confluent zone around the 100.00-level, of which the 50% retracement of that same move sits just .15 below.

PM May, BoC, U.S. and U.K Inflation to Headline Next Week

Chart prepared by James Stanley

Next week brings U.S. CPI on Wednesday and this will likely be the centerpoint for USD price action next week; at least given what we have on the calendar.

Will British Inflation Tick-Higher, and Will the Cable Respond?

Next week also brings U.K. inflation from the month of December, and this could be a big driver for GBP price action given the heavy focus being paid towards higher prices in the U.K. economy after the ‘sharp repricing’ in the British Pound following the Brexit referendum. But, this isn’t the only U.K. item on the calendar for next week pertinent to the British Pound, as we also hear from Prime Minister May for the widely-awaited ‘Brexit speech’ on Tuesday. This is when PM May is expected to lay out plans for Britain’s execution of the divorce from the European Union.

This could keep the British Pound extremely volatile, especially in the early portion of next week. Sterling traders should stay extremely nimble on Tuesday as we get both inflation numbers and PM May’s speech.

From a technical perspective, the British Pound is currently sitting near support that developed after the ‘flash crash’ in early October. Cable tested that support earlier in the week and buyers responded. On the chart below, we’re looking at two different support areas on the 4-hour Cable chart. The first, at the 76.4% retracement of the post-Flash Crash move at 1.2139 and the second from 1.2037-to-1.2100.

PM May, BoC, U.S. and U.K Inflation to Headline Next Week

Chart prepared by James Stanley

Will the Canadian Dollar Finally Find Resistance?

USD/CAD broke below a widely-watched trend-line earlier this week, and given the massive strength that CAD has seen since the end of December, many have begun to plot bearish continuation strategies on USD/CAD to try to take advantage of that strength.

Next week brings us a Bank of Canada rate decision on Wednesday and there is little hope for any actual moves on rates. More pressing, however, will be comments from BoC Governor Stephen Poloz. In October, Mr. Poloz had dropped a comment pertaining to the fact that the BoC had discussed monetary stimulus options at their most recent rate decision. This helped USD/CAD find support just north of the 1.3000 level before beginning a move higher (CAD weakness on this new information). But in the weeks after that comment, Governor Poloz effectively walked that comment back by providing a timeline of ‘about 18 months’ for any potential stimulus actions.

USD/CAD is currently testing the zone of support that was developed around that October BoC meeting. For traders looking to accumulate long-USD exposure, this could be an attractive area to keep an eye on for next week. And for those that are investigating bearish-continuation strategies – they’d likely want to wait until we saw a concerted break of the 1.3000 psychological level before proceeding-ahead.

PM May, BoC, U.S. and U.K Inflation to Headline Next Week

Chart prepared by James Stanley

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

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