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RBA, ECB, NFP to Drive Next Week's Price Action

RBA, ECB, NFP to Drive Next Week's Price Action

2017-03-03 14:30:00
James Stanley, Strategist
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Talking Points:

- This week saw a key break of a pivotal resistance level on the U.S. Dollar, as price action in the Greenback signaled the possibility of more gains ahead.

- A chorus of hawkish Fed speakers appears to be the source of the Dollar’s strength; and this afternoon we hear from Fed Chair Janet Yellen and Vice Chair, Stanley Fischer ahead of the bank’s ‘blackout period’ ahead of their next rate decision in a week-and-a-half.

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Next week brings a series of important events to markets, with the both Australian and European Central Banks hosting rate decisions; and on Friday of next week – we get what’s looking to be a pivotal Non-Farm Payrolls report as this will be the final major data point to consider before going into their two-day meeting and rate decision in the week after.

This has already been a rather brisk week for markets, and we’re not yet done. Later this afternoon, both Fed Chair Janet Yellen and Vice Chair Stanley Fischer are offering commentary to markets; and this will be the last set of public speeches by Fed officials before the bank moves into its ‘blackout period’ before the next rate hike. So this will be the last opportunity for Fed-speak to evoke volatility across markets before that next rate decision in a week-and-a-half (March 14-15). Expectations for a hike in March have shot-higher this week, and as we looked at yesterday, a large part of this drive has been Fed commentary. This week alone, we have heard from William Dudley, Patrick Harker, John Williams, Lael Brainard, Jerome Powell and Robert Kaplan – and all have seemingly suggested that a rate hike is ‘near’.

The U.S. Dollar put in aggressively bullish price action on Tuesday to finally pose a sustained break above a key level of resistance at 101.53.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

RBA – Tuesday Morning

The Reserve Bank of Australia hosts a rate decision on Tuesday morning (Monday evening in the States), and the expectation is for no move. The RBA finds itself in an unenviable position here. Concerns are very real around the continued and rampant run in real estate prices; and earlier this week, credit rating agency Standard and Poors warned that a downgrade may be in order for most of the country’s banks as economic risks continue to rise.

On the other side of the coin – Australian growth and inflation continue to remain subdued, and trade numbers haven’t been particularly positive. So, while this seemingly eliminates the possibility of an interest rate hike, a cut to rates doesn’t seem to be a requisite option either as the fear that lower rates will propel real estate prices even-higher.

The Australian Dollar put in a key break this week. For the past ~year, AUD/USD has been caught in a range between the levels of .7200 and ~.7750. And after re-entering this zone in mid-February, the pair spent two weeks at resistance before sellers finally took control.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

And that break put-in by Aussie is shown below, as sellers were finally able to bring prices back below the .7600-handle. This highlights an attractive area of support as part of that ~year-long range, near the .7200 handle where a batch of confluent Fibonacci levels reside.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

Below, we get a little closer on that break to highlight the potential for short-term momentum to continue carrying-lower.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

ECB is on Thursday

At the European Central Bank meeting on Thursday, the big question will likely be just how sensitive the bank is to rising inflationary forces and, whether or not this may spurn the start of tightening or even perhaps the tapering of their bond buying program. We likely won’t see much change here – in the week after this meeting, Dutch elections are taking place and of course in the months following we have key elections in both France and Germany. The order of Thursday appears to be balance for Mr. Mario Draghi, with a heavy dose of caution; and the press conference is likely where any forms of volatility in Euro-related assets may emanate from.

On the chart, EUR/USD appears to have run-in to a rather indomitable form of support around the 1.0500 handle. We had highlighted this level this zone last week when it came back into-play, and another visit this week elicited buyers to bring prices higher, yet again.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

What makes this zone of support so incredibly interesting is the longer-term connotations at or around these levels. The ‘big run’ lower in EUR/USD really took place before ECB QE ever got started. QE was announced in the summer of 2014, set to come online in March of 2015; and curiously that’s just about where EUR/USD had set its prior-low. During most of the ECB’s QE-drive, EUR/USD remained in an upward-sloping channel, which when combined with the prior bear-run, produces a bear flag formation (shown below).

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

In December of last year – market forces were very much behind the back of Euro-bears; as the one-two combo of the ECB triggering another QE program, and then the Federal Reserve hiking rates for only the second time in 10 years produced what should’ve been a continuation of bearish momentum; as both prevailing fundamental forces representing the pair were pointing the same direction.

But the bearish momentum didn’t continue for long, as we saw a mere ~100-pip down-side break of that prior March 2015 low before buyers stepped-in again. Deductively, this may be highlighting that the down-side run in EUR/USD is nearing completion.

RBA, ECB, NFP to Drive Next Week's Price Action

Chart prepared by James Stanley

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

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