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Digesting Congestion Across FX Markets Ahead of Trump Speech

Digesting Congestion Across FX Markets Ahead of Trump Speech

2017-02-28 14:12:00
James Stanley, Strategist
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Talking Points:

- This week’s economic calendar is loaded; but in the near-term there is one big event that is on markets’ minds, and that’s the ‘Address to a Joint Session’ from U.S. President Donald Trump at 9PM ET tonight.

- While U.S. equities continue to rally in runaway fashion, all is not appearing well with the ‘reflation’ trade, as bond prices have remained elevated. Many FX markets are displaying some form of congestion, and tonight, markets will be looking for clues in President Trump’s speech to get an idea for what might be ‘around-the-corner’.

- 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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Tonight at 9PM we will get the ‘Address to a Joint Session’ from U.S. President, Donald Trump. Many will often refer to this type of speech from the U.S. President to both houses of Congress in the early part of the year as a ‘State of the Union’ Address; but technically the President needs to be governing for the year prior to be able to call this address ‘State of the Union’. This, instead, is referred to as an ‘Address to a Joint Session’. The expectation is that President Trump is going to use this speech to outline his goals and priorities for his administration’s first year. Markets will be actively looking for clues on potential tax cuts, along with fiscal and infrastructure spending.

Many markets are in some form of congestion ahead of tonight’s speech. The notable exception being U.S. equities, as they’ve only continued to ramp-higher to further extend their post-Election gains. Positive details on the front of tax cuts or infrastructure spending could help propel further gains across the equity space.

U.S. Dollar

The U.S. Dollar, however, is considerably less-directional. The ‘big picture’ up-trend that started on the night of the election is still alive, albeit significantly less-boisterous than what we were seeing at the beginning of the year. Much of January was spent trending-lower after the top-side rip in November and December. The first half of February looked as if the Dollar was ready to come-back, with the Greenback running into a very important resistance level at 101.53. This is the 50% retracement of the January down-trend; and if price action would be able to pose a sustained break above this level, the prospect of additional gains would look more attractive.

On the under-side of price action, there are supports at 100.39, 100.00 and 99.23. Given the recent tone of the Trump Administration towards the ‘Strong Dollar’ theme, it might be difficult to imagine how the President might elicit Dollar strength today. If President Trump talks about ‘currency manipulators’ at tonight’s speech, that will likely bring on additional Dollar weakness, as it shows that the administration is actively looking at ‘beggar thy neighbor’ currency-weakness strategies from trade partners.

Digesting Congestion Across FX Markets Ahead of Trump Speech

Chart prepared by James Stanley

USD/JPY Wedging Off Support

USD/JPY was probably one of the more attractive currency pairs in the post-Election backdrop. And even during the January retracement, the pair held up a bit better than general USD trends, as the Greenback retraced more than 50% of its post-Election move while USD/JPY only retraced 38.2% of that same move.

As of this morning, price action in USD/JPY is continuing to catch some form of support at this 38.2% retracement at 111.96; and this is part of a ‘big’ zone of long-term support. For this type of setup – the more aggressive way to play such an idea could be to wait for tonight’s speech to see if President Trump elicits a quick-dash of USD-weakness to probe deeper into this zone of support, or perhaps even below it by a little bit.

Given the long-term trend that’s continued to hold, a quick breech of support would bring with it the possibility of clearing out a lot of trailed stops on bullish positions. If buyers step in shortly after, the prospect of a top-side reversal could look a bit more attractive.

Digesting Congestion Across FX Markets Ahead of Trump Speech

Chart prepared by James Stanley

Cable Congestion Continues…

A surprising big-mover around the U.S. Election was the British Pound. Perhaps unbelievably, the British Pound was actually one of the few global currencies that was stronger than the U.S. Dollar in the month of November.

But that strength didn’t hold, as Brexit fears re-emerged throughout December and into January, driving the currency right back down to support. Since then we’ve seen prices come back a bit; but sellers have remained active as the pair comes-up to test another resistance level. We discussed this in our Technical piece on GBP/USD last week, and that setup essentially remains the same with prices unable to break out of this rash of congestion.

Digesting Congestion Across FX Markets Ahead of Trump Speech

Chart prepared by James Stanley

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

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