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ECB, BoJ Headline Next Week as USD Tries to Carve Out Support

ECB, BoJ Headline Next Week as USD Tries to Carve Out Support

2018-01-19 14:30:00
James Stanley, Strategist
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Talking Points:

- The European Central Bank (ECB) and the Bank of Japan (BoJ) headline next week’s economic calendar.

- Each Central Bank is likely to look to avoid additional strength in representative currencies, but the more pertinent question is whether markets comply.

- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

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ECB, BoJ Headline Next Week's Calendar

Next week’s economic docket picks up with Central Bank rate decisions out of Japan and Europe. The BoJ announces their rate decision on Monday evening (Tuesday morning in Europe and Asia) followed by the European Central Bank on Thursday. Each of these banks have been in the headlines in recent weeks, and this can certainly carry a bearing on price action as we trade through next week’s calendar.

DailyFX Economic Calendar, High Impact Events for Next Week

DailyFX Economic Calendar Filtered For High-Impact Events

Taken from the DailyFX Economic Calendar, filtered for high-impact events

The Bank of Japan Meets on Tuesday

Out of Japan – markets were postulating that the BoJ may be looking to begin a ‘stealth taper’ of their QE outlay after the bank bought fewer long-dated bonds last week. This created considerable Yen strength over a short-period of time which, at this point, has been soundly faded out of most relevant markets. EUR/JPY has moved right back to previous highs after last week’s sell-off, and GBP/JPY set a fresh post-Brexit high just yesterday.

EUR/JPY Eight-Hour: Aggressive Pullback on Stealth Taper Worries

EUR/JPY Four Hour Chart with Trend-Line and Support Applied

Chart prepared by James Stanley

The big question around the BoJ for next week is whether the bank tips their hand towards an initial move away from loose policy. Any talk of normalization could be construed as a factor of strength for the Yen, potentially creating a ripple effect (pun intended) as market participants gear-up for an eventual slowing of Japanese QE. But – is this really on the cards? Inflation in Japan remains well-below the bank’s 2% target, and up until last week, there were few signs that the BoJ may be close to letting up. The Bank has been bitten by surprise moves in the past, including the vicious response to their move to negative rates in January of 2016. Since then, the BoJ has made a noticeable effort to be more transparent with markets, so if we are to get any hat tip or warning, likely this will be in a subtle manner.

USD/JPY has been range-bound since the first quarter of last year, so for traders that are looking for potential trends, better environments might be found elsewhere like GBP/JPY or CAD/JPY.

USD/JPY Daily: Range-Bound Since Q1, Last Year

USD/JPY Daily Chart - Range-Bound Since Q1 of 2017

Chart prepared by James Stanley

The European Central Bank is Thursday

The ECB extended their QE program in October of last year, and ever since the primary question appears to be whether the ECB will be ready to start tapering their bond buying program when it ends in September. Markets, for their part, never really gave up on the prospect of stimulus taper out of the ECB; as the bank’s move to extend their program in October brought a mere two weeks of weakness into the single currency. By mid-November, bulls had returned after a robust GDP print out of Germany, and buyers have been in-control ever since.

EUR/USD Daily: Bulls Undeterred After ECB Extended QE

EUR/USD Daily Chart with Trend-Line and Fibonacci Applied

Chart prepared by James Stanley

Earlier this week, we heard from Vitor Constancio, the Vice President of the ECB, and he said that sudden price changes in the Euro ‘don’t reflect changes in fundamentals,’ and this helped to temper that bullish trend for all of a couple of days; but after support showed-up at a key Fibonacci level, buyers pushed prices right back up towards prior highs.

The big question around the ECB for next week is whether the bank is actually able to dent this bullish trend in the Euro. It’s been obvious for some time that the ECB would like a softer Euro, as this strength only makes the prospect of continued recovery in the bloc even more daunting. There’s also considerable discord over what Mr. Constancio was talking about, whether the move in the Euro currency has gotten ahead of itself, as yield spreads between Europe and the U.S. don’t quite support the move.

And while this is debatable, as to which market might be ‘right’, the theme is fairly clear, as this is the inverse of what took place in 2014-2015 as markets were pricing in the eventual oncoming of European QE. The European QE program started in the second week of March 2015, right around the time the EUR/USD bearish trend had set-in to support. And that support held for much of the next year-and-a-half, until last year, when markets began to price-in the eventual taper of QE out of the European Central Bank.

EUR/USD Weekly: QE Getting Priced-In (Red), QE (Grey), Reverse (Blue)

EUR/USD Weekly Chart with QE Flows Applied

Chart prepared by James Stanley

USD Back-and-Forth After Three-Year-Lows

The U.S. Dollar started the week with a bang, sinking down to a fresh three-year-low as trading opened for this week. And bears remained active, hitting resistance at a key price level on Wednesday, only for the Dollar to sink back down towards prior lows. Interesting, however, is how that bearish drive has appeared to dry-up as we’ve moved closer to the 90.00 level on DXY. We’ve seen a few different attempts to take out that low thwarted, and the net result is back-and-forth near-term price action with a bigger picture bearish bias.

U.S. Dollar via ‘DXY’ Hourly: Monday Sell-Off Leads to Back-and-Forth

U.S. Dollar via 'DXY' Hourly Chart with Near-Term Support Applied

Chart prepared by James Stanley

The big question as we go into next week is whether the Dollar is able to take-out the 90-level on DXY. If we do see a move of strength in the Euro, or perhaps even a hat tip towards an eventual stimulus taper or ‘normalization’ out of Japan, this could certainly be possible.

Otherwise, should we hear both the BoJ and ECB take passive approaches that do not indicate any element of tightening on the horizon, the Dollar may revisit resistance that could open the door for longer-term bearish continuation strategies. Below, we’re looking at a series of resistance levels in DXY that could be usable for such a purpose.

U.S. Dollar via ‘DXY’ Four-Hour: Potential Resistance Applied

U.S. Dollar via DXY Four-Hour Chart with Potential Resistance Applied

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on Euro, GBP or the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our EUR/USD, GBP/USD and U.S. Dollar pages. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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

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