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Three Forex Trends to Face Tests at Jackson Hole

Three Forex Trends to Face Tests at Jackson Hole

2017-08-22 13:05:00
James Stanley, Strategist
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Talking Points:

- Markets are relatively quiet on the early portion of the week, alluding to the fact that many are likely waiting for the Jackson Hole Economic Symposium before adding on any significant exposure.

- The U.S. Dollar remains extremely weak as we move towards the symposium. At last year’s event, the one-two combo of Janet Yellen and Stanley Fischer were able to evoke a move of strength in the Greenback. Are we headed for a repeat?

- 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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Thursday marks the start of this year’s Jackson Hole Economic Symposium. The theme for this year’s event is ‘Fostering a Dynamic Global Economy’, and there are two gigantic question marks revolving around two of the world’s largest economies as we near the event: For Fed Chair Janet Yellen and the Federal Reserve out of the United States, those questions revolve around balance sheet reduction; and for Mario Draghi and the European Central bank, the big item of interest is when the ECB may start to step back from their massive stimulus outlays.

For traders, the hope is that we’ll see the spark of some new trends that may have some continuation potential. While this year’s major trends in the U.S. Dollar and the Euro have been robust, they’re both a bit stretched at the moment, and this is urging caution around continuation approaches. Below, we’ll look at three of the ‘bigger’ FX market themes to watch that will face some form of test in the coming days.

EUR/USD

Keep this one circled on your charts, because it’ll likely be on the move as we approach week-end. Both Janet Yellen and Mario Draghi are speaking at the symposium, and each is expected to deliver some form of new information on each banks’ respective plight towards quantitative tightening. Curiously, each of these moves towards tighter policy bring varying market impact, or at least expectations of impact. For the Fed – the expectation is to hear the bank give a bit more information on the topic of balance sheet reduction, specifically timing, and how that might fit with the rate hike plans at the Fed. Since the Fed started talking about the balance sheet in March, markets have seemed none-too-happy, as the Dollar has basically just been shelled since that March rate decision.

Out of Europe – Mario Draghi has been trying to avoid the topic of QE taper. This has had a waning impact on the Euro, as his avoidance of the topic at the April and June ECB decisions brought a couple weeks of weakness to the single currency (shown in purple below), while his similar strategy in July seemed to fail as the Euro rallied through the duration of his press conference (shown in blue).

EUR/USD Daily: The Diminishing Marginal Utility of Dovish Draghi (post-ECB price action indicated)

Three Forex Trends to Face Tests at Jackson Hole

Chart prepared by James Stanley

It appears that we’re *finally* at that time when the ECB is ready to make some form of an announcement, but we may have to wait for the bank’s rate decision in two weeks to get anything more formal. Nonetheless, any allusions to QE-taper from Mr. Draghi at Friday’s speech can bring another run of strength into the Euro; while any negativity of skepticism on the topic will likely see some form of fade, similar to what happened at last month’s ECB rate decision.

The trend in EUR/USD has been rigid since it really began to heat up in June. There has been very little pullback, very little retracement, and buyers have remained rather active here as the pair has continued to accelerate towards fresh yearly highs. The big question around the pair is whether Jackson Hole can bring a pullback to this trend. More likely, this would be more-related to USD-strength as opposed to direct Euro-weakness, as Draghi has been doing what he can to keep the single currency weak but it simply hasn’t worked. If Draghi is able to calm markets around the higher rates out of Europe theme, while Janet Yellen is able to urge some stability in the U.S. Dollar as the bank nears the highly-untested path of balance sheet reduction, we could see a deeper retracement form in EUR/USD.

EUR/USD Four-Hour Chart: Deeper Support Potential Around 1.1600, 1.1500 Handles

Three Forex Trends to Face Tests at Jackson Hole

Chart prepared by James Stanley

USD/CAD

One of the biggest beneficiaries of the recent run of weakness in the U.S. Dollar has been the Canadian Dollar. As the Federal Reserve has shifted focus towards tightening the money supply via the balance sheet, the Bank of Canada has started to discuss ‘less loose’ policy options, leading to a run of CAD strength that isn’t too dissimilar to what’s been seen in the Euro.

USD/CAD put in a 10% move from the May high to the July low. Over the same period of time, ‘DXY’ is down by 7.4%, so this highlights the additional CAD strength that’s shown up over the past few months. Similar to that move in EUR/USD, the jump of CAD strength was smooth and one-sided, with very little pullback on the way down, at least until we got into August. This run-lower in the pair led into a fresh two-year low as USD/CAD sank below a key support zone that exists between 1.2625-1.2675.

If we do see the theme of USD-weakness run even-lower, USD/CAD could be an attractive candidate as the Bank of Canada is one of the few major Central Banks that’s had some degree of clarity with their policy initiatives (which is what’s led into these clean-ish type of trends).

USD/CAD Daily: Aggressive Trend Since Early-May, Attractive for Continuation of USD-Weakness

Three Forex Trends to Face Tests at Jackson Hole

Chart prepared by James Stanley

USD/JPY

Interest around USD/JPY has waned over the past few months, and this is likely due to the fact that the pair pretty much stopped trending. That’s been somewhat of the exception and not the rule since 2012, when Japanese PM Shinzo Abe initiated the ‘three pillars’ approach towards ‘Abenomics’. This led to two significant runs of Yen weakness over a three-year-period; but when Chinese markets began to wobble in the summer of 2015, matters began to change.

Those previous trends of Yen weakness turned around on a proverbial dime. In the first six months of 2016, more than half of that prior move was erased, and prices straddled the psychologically important 100.00 level throughout last summer. But after the U.S. Presidential Election ushered in the ‘reflation trade’, Yen weakness came back with gusto and the pair was trading above 117.00 by the end of the year.

But 2017 hasn’t been so kind to Dollar bulls. After spending the first four months of the year trending lower, USD/JPY has developed into a rather aggressive range. Since mid-April, price action in the pair has oscillated from a support zone between 108.15-109.00 and resistance between 114.00-114.50.

USD/JPY Weekly: Range-Bound After a Prior Proclivity to Trend

Three Forex Trends to Face Tests at Jackson Hole

Chart prepared by James Stanley

If we do see a break in the Dollar around Jackson Hole, this could lead to the substantiation of fresh trends in the Greenback. The backdrop with which USD/JPY is most attractive is likely one of USD-strength. While the Dollar has been aggressively heading lower for much of the year, including the past four months, USD/JPY has held the line by staying in a range-bound pattern. If we do actually see USD-strength begin to show at Jackson Hole, similar to what we saw last year, this could lead to an aggressive topside move in USD/JPY.

USD/JPY Daily: Range-Bound USD/JPY at Support Ahead of Jackson Hole

Three Forex Trends to Face Tests at Jackson Hole

Chart prepared by James Stanley

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

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