Top Three FX Price Action Themes for Next Week

2017-02-24 14:28:00 James Stanley

Talking Points:

- While this week was relatively light on the data front, next week picks up considerably. Of note – Non-Farm Payrolls is NOT next Friday. February Non-Farm Payrolls will be reported on the following Friday, March 10th.

- In today’s piece, we look at three of the more interesting price action themes for traders to follow through next week’s gauntlet of news.

- 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 (SSI) Indicator.

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While this week was relatively light on the data front, next week picks up considerably with multiple ‘high impact’ announcements on each day, Tuesday-Friday. Despite the few drivers that were on the calendar for this week, price action continued to put in interesting moves across the FX-spectrum as another Wednesday reversal took place in the U.S. Dollar. Last week’s Wednesday reversal took place after a robust U.S. CPI beat but before the start of Fed Chair Janet Yellen’s second day of testimony in front of Congress, as part of the bank’s twice-annual Humphrey-Hawkins report. This week’s USD reversal on Wednesday came-in after the release of FOMC minutes; highlighting the deeper congestion that price action in the Greenback is continuing to face. On the chart below, we look at this recent congestion, and below that, we delve into three of the most pertinent price action themes for next week.

Chart prepared by James Stanley

Will the Greenback Find Support?

The first half of February gave the appearance that an up-trend in the Greenback was ready to return. But just ahead of Chair Yellen’s second day of testimony, sellers came-in at a key level on the Dollar around the 101.53 level, which is the 50% level of the January retracement in USD. If price action was able to pose a sustained break above this level, it would give the appearance that the January retracement is resolved and that price action is ready to proceed further ahead. Sellers weren’t having any of this, however, and this showed-up again this week on Wednesday after the release of FOMC minutes from the most recent meeting three weeks ago.

The longer-term posture in the Dollar still remains as bullish, as price action is still trading above the resistance level that had capped USD-gains throughout 2015 and much of 2016. But the big question at this point is when bulls might return to start bidding the Dollar higher, again. The primary point of contention on that theme, at least at current, appears to be the possibility of a March rate hike. If markets fear that there might be a slightly higher probability of a hike at the bank’s next meeting in June, we could see a knee-jerk reaction of strength in USD. But that doesn’t appear to be a concern at the moment, as markets aren’t looking for that next rate hike until June. This could all change very quickly with Fed-speak or a surprise data print or, perhaps, a tweet or two from someone in particular.

On the chart below, we’re looking at two potential support levels on a shorter-term U.S. Dollar chart.

Chart prepared by James Stanley

Is Yen Weakness Done?

Also not on the calendar this week were some surprise comments from BoJ Governor Haruhiko Kuroda when he spoke about negative rates in Japan. It’s pretty universally accepted that the BoJ’s ‘stealth’ move to negative rates in January of 2016 was a pretty bad idea. Not only did this serve to unsettle investors in the Japanese economy, but it presented the bank as rather unpredictable; which for a situation of ‘crisis management’ is a pretty bad characteristic. And the BoJ paid for that decision. While the move to negative rates elicited a single day’s worth of Yen weakness, the following four months were brutally painful as USD/JPY took a swan-dive from ¥120.00 all the way down to test the ¥100.00 level.

The BoJ needed to make a change, and that’s precisely what happened in September when the bank shifted their target for QE while performing a ‘comprehensive review’ of current policy outlay. And just a month and a half after that, the BoJ got a veritable gift in the form of Donald Trump as the ‘Trump Trade’ re-strengthened the Dollar and lifted USD/JPY back-up towards ¥118.50.

But as strength showed in Japanese markets, much of which was denominated by Yen-weakness, the big question became when the BoJ might feel comfortable enough to actually begin making slight tweaks of tightness to current policy outlay.

Earlier this week, BoJ Governor Haruhiko Kuroda gave comments that would indicate that the bank is getting a bit cozier with this most recent market move; when he said that ‘there is not much likelihood that we will further lower the negative rate’.

This put a bit of a damper on the short-Yen trade as it would appear that the BoJ is first making a move or offering comments that are simply ‘less dovish.’ But the next logical step after that would be making a hawkish move, with some even considering the possibility of a BoJ rate increase to 0% in the not-too-distant future.

From a technical perspective – the Yen has remained strong ever-since these comments came-out, further giving rise to the idea that a reversal may be afoot in Yen-pairs. On the chart below, we’re looking at USD/JPY sink down to a very interesting 80-pip zone of support from 111.61 up to 112.40. The 38.2% retracement of the ‘Trump Trade’ in USD/JPY is in the middle of this zone at 111.96; and if buyers are unable to hold price action in this area of support, the prospect of a ‘bigger picture’ reversal will likely look considerably more attractive. While USD/JPY is above this zone, however, the longer-term posture would still be bullish in nature.

Chart prepared by James Stanley

Has Euro Set the Low?

Next week sees a heavy implementation of European data, and after an interesting reversal in EUR/USD this week, the pair is primed to move for next week. Earlier in the week, before that reversal in USD took place, EUR/USD sank down to a very interesting zone of support around 1.0500-1.0527. Buyers showed-up shortly after that support came in-play and drove prices-higher by ~120 pips. But we are nearing a couple of very interesting potential points of resistance that sellers could come-in; and if EUR/USD is able to break-above these levels next week, driven by a plethora of data, the prospect of top-side continuation in the Euro will likely seem considerably more-likely.