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Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

2017-03-06 14:30:00
James Stanley, Currency Strategist
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Talking Points:

- This is a busy week for markets, and next week brings the March FOMC rate decision in which markets are now pricing-in an interest rate hike from the Federal Reserve.

- Last week saw a big jump in probabilities for a hike in March, and the big question now is whether markets can hold on to these gains (in the U.S. Dollar), as the prospect of tighter policy from the U.S. becomes ‘more real’ as we near that next rate decision.

- 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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Last week saw the significant rise in expectations for a March rate hike from the Federal Reserve, and this produced a top-side breakout in the U.S. Dollar as the Greenback cleared a key resistance level. With that rate decision now just a week-and-a-half away, probabilities for a hike in March had shot past 90% to close last week; and this is after opening last week at around 40%.

So, despite the lack of discernible US-drivers availing themselves to markets this week, at least until we get to the Friday release of February Non-Farm Payrolls; the U.S. Dollar will likely remain a focal point as the Fed’s March rate decision in the following week (March 14-15) will continue to draw attention with hopes/expectations/fears of an impending rate hike.

On the chart below, we look at three potential areas to watch for support on ‘DXY’ in the effort of top-side continuation in the U.S. Dollar. At this early stage of the week, the optimal zone for that support to develop would appear to be around the 101-handle, or approximately 38.2% of the bullish move in the Greenback that started in early-February.

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

Aussie Will be in the Spotlight

Australia will see a series of drivers rolled out this week. First we get the RBA rate decision, and there is scant expectation for any movement there. As we had written on Friday of last week, the RBA is between a rock-and-a-hard place on the rates front; with potential cuts bringing even more ‘exuberance’ in the real estate market with any potential hikes carrying the possibility of choking off growth and exports, even more. But after this rate decision on Tuesday morning (10:30 PM ET on Monday Night for U.S. traders), a couple of Chinese prints later in the week could further drive price action; with particular interest being paid to Chinese inflation numbers released on Thursday morning (Wednesday at 8:30 PM ET for U.S. Traders).

From a technical perspective – last week’s burst of strength in the Greenback appeared to help AUD/USD kick-start the next phase of its range. AUD/USD has been range-bound for the past year, and last week saw a down-side move off of the resistance zone around the .7750-zone; opening the door for targets around the zone of support towards the .7200-vicinity:

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

AUD/JPY may offer more allure for directional approaches:

Given the range-bound nature of AUD/USD over the past year, traders may want to look elsewhere if trying to trade a directional move in the Australian Dollar; and such a setup may be presenting itself in AUD/JPY. AUD/JPY is running up against a very interesting level of confluent resistance around the ¥87.50 psychological level. On the weekly chart below, we’re looking at this level on the AUD/JPY chart since 2007.

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

On the 4-hour chart below, we drill-down a little closer to look at near-term price action in AUD/JPY after buyers were unable to support prices above that key level around ¥87.50-¥87.70.

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

Is the ECB nearing a policy pivot?

Of recent, inflationary data out of the Euro-zone has begun to show positive signs of life. But for the ECB, this may not be all that positive as it could move the bank away from their current outlay of loose policy options and, eventually, mandate a bit of tightening. This likely wouldn’t entail interest rate hikes in the near-term, but with the ECB’s first QE program set to expire at the end of this month, leaving the bank with €60 Billion a month in bond purchases.

Mathematically speaking, since we’re seeing a total of €140 Billion this month with the two programs; when the first program of €80 B/month expires at the end of March, this, effectively, would be a taper. So when the ECB meets this week and hosts their Thursday press conference, considerable attention will likely be paid towards Mr. Mario Draghi and how confident he feels on this recent improvement in European inflation.

If Mr. Draghi does signal a bit of optimism around the recent improvement in data, this could reverse weakness in the Euro as investors begin to price-in and prepare for the inevitable path of ‘less loose’ monetary policy from the ECB. Longer-term price action in EUR/USD remains in an interesting spot as the bear-flag that developed in the pair throughout 2015 continues to illicit interest from buyers and sellers.

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

And on the 4-hour chart below, we dial in to look at more near-term price action. We can see two different iterations of support developing around the big figure at 1.0500; but short-term resistance has come-in on the lower-line of that bear-flag shown above. If price action is able to break above this trend-line, then longer-term price action would’ve returned to the bullish trend-channel that made up that prior bear-flag formation.

Aussie, Euro and the U.S. Dollar Are Primed to Move This Week

Chart prepared by James Stanley

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

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