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Top Three Forex Themes for This Week

Top Three Forex Themes for This Week

James Stanley, Senior Strategist

Talking Points:

- This week opens with a rather busy calendar after last week’s quieter outlay; but keep in mind the potential for a continuation of risk aversion. Last week we discussed how the Japanese Yen could be used for themes of continuation or reversal of risk aversion.

- This week’s calendar has high-impact data out of the U.S., the U.K., and Europe, and below we look at current price action dynamics in each of those markets relative to this week’s outlay of drivers.

- If you’re looking for trade ideas, check out our Trading Guides. And if you’re looking for shorter-term ideas, please check out our IG Client Sentiment.

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While last week was a bit quieter on the data front, price action remained active as the prospect of risk aversion began to get priced-in across global markets. This week picks up on the data front with high-impact economic releases coming out of Europe, the U.K and the United States; each of which can provide a boost in either direction for prices. And while these data points can certainly clue markets in on recent developments within each of these economies, the potential for continued risk aversion remains high and, frankly, unpredictable, as a tweet at any time could tilt the situation back into a rather worrisome direction.

Matters get started rather early with tomorrow’s release of U.K. inflation. This is a big data point for the U.K., as this will be the first inflation print after last month’s BoE rate decision. At that meeting, the bank took a familiar dovish tone, remaining extremely cautious even as inflation rises to the point where the Boe may need to investigate a rate hike. They even said as much in the meeting minutes from that most recent rate decision, but the MPC remains so cautious around the potential slowdown from Brexit that even with those potential rate hikes, the bank wants to remain dovish and passive with near-term inflationary forces.

Where that seems to play is the 2.8% number. The BoE’s inflation target is 2%, but they’ve previously said they expect inflation for the rest of the year to come-in around 2.8%, which may not require any rate adjustments. In June, when May inflation came-in at 2.8%, markets began to show strength in GBP under the anticipation that the BoE may need to make a move before the end of the year. But when inflation came-in at 2.6% a month later, that strength was priced-out before the BoE meeting last week. Tomorrow brings us our first inflation print since that meeting, and the expectation is for headline CPI to come in at 2.7% with Core CPI coming-in at 2.5%.

On the four-hour chart below, we’re looking at the range that developed in Cable last week after the bearish move following BoE and NFP from the week prior. A break-below prior swing-support at 1.2928 could open the door to bearish continuation strategies.

GBP/USD Four-Hour: Range Develops After Bearish Move post-BoE

Top Three Forex Themes for This Week

Chart prepared by James Stanley

Euro

Also on the docket for this week are a series of prints out of Europe. Tuesday brings German GDP numbers, and Wednesday brings Italian and Euro-Zone GDP; but it’s the meeting minutes that are released on Thursday that will likely garner the most attention, as investors continue to look for potential clues as to when/where/how the European Central Bank may be exiting their stimulus program.

At ECB meetings in April, June and July, markets showed a diminishing appetite for Mario Draghi’s dovish claims. Throughout the year, the head of the ECB has attempted to allay ‘tapering’ concerns of market participants trying to get in-front of a potential stimulus exit. In April, when Mario Draghi said the bank hadn’t even discussed such a prospect, EUR/USD tamed-down to support and stayed there for two weeks before popping-higher again. Similar price action in June showed up, but in July – markets didn’t seem to be buying what Mr. Draghi was selling as those dovish claims during the press conference following the rate decision led-in to more and more buying.

The next few weeks are big on this front: This week brings these key data points along with meeting minutes from the July ECB rate decision; but next week brings Jackson Hole, where Mr. Draghi is supposed to make an appearance. Two weeks after that is the pivotal ECB rate decision for September, where many investors are expecting the bank to provide information on what they plan to do with stimulus in the immediate future.

Bulls remain active on this front under the apparent presumption that the ECB will have to go ‘less loose’ with monetary policy. Last week saw the first notable pullback in EUR/USD since early-July; but buyers weren’t willing to wait around as the pair quickly re-ascended back towards 1.1800. On the Daily chart below, we can see how this bullish move in EUR/USD began to take on a life of its own in latter-June, producing a significantly-steeper slope in the blue trend channel opposed to the prior green.

Top Three Forex Themes for This Week

Chart prepared by James Stanley

On the above chart, you’ll probably notice the two lines helping to set current support. Each of these levels are derived from longer-term Fibonacci studies, and this can help to produce a ‘zone’ of potential support for buyers to follow under the motivation of trend continuation. Price action tested this zone for a couple of days last week, but buyers were able to lift prices above: If we get another re-test of this zone, particularly if the prior swing-low at 1.1688 remains respected, the door can be opened for bullish-continuation strategies.

Top Three Forex Themes for This Week

Chart prepared by James Stanley

U.S. Dollar

The U.S. Dollar did not set a new low last week. This would the first time that’s happened since early-July, and only the second since mid-June. Prices in the Greenback popped-higher after NFP at the beginning of August, and for the early portion of last week, appeared to be trying to make a bullish move as higher-low support continued to hold. But as has become typical in the Dollar, sellers remained active at resistance until, eventually, bulls gave up and prices began to tilt-lower.

We get three pieces of high-impact U.S. data this week with Advance Retail Sales on Tuesday, FOMC Meeting Minutes on Wednesday and U of Michigan Consumer Confidence on Friday. Each of these can bring some volatility into the Dollar, and the meeting minutes on Wednesday may garner special attention as investors attempt to get a pulse on how quickly the Fed is looking to start balance sheet reduction and how aggressively they may be looking to manage rate hikes while doing so.

On the Daily chart below, we can see just how weak the U.S. Dollar has been, as the post-NFP pop helped to set resistance that sellers continued to hit repeatedly last week.

U.S. Dollar Daily via ‘DXY’: Sellers Respond to Higher-Low Resistance

Top Three Forex Themes for This Week

Chart prepared by James Stanley

On the hourly chart below, we can see how sellers worked-off of post-NFP resistance last week. As prices neared- the prior Friday high, sellers would come-in to take-over. Buyers had held support at the higher-low (shown in blue) until Friday morning’s CPI report brought another gust of weakness into the Greenback.

For those that are entertaining reversal possibilities, they’d likely want prices to print above 94.00 before getting too active, in the effort of confirming that bulls may be able to take control of price action in the Dollar for more than a couple of hours.

U.S. Dollar via ‘DXY’ Hourly: Breakdown of Bullish Price Action post-NFP

Top Three Forex Themes for This Week

Chart prepared by James Stanley

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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