Talking Points:
- This week’s economic calendar offers a couple of key releases of meeting minutes from past rate decisions, with FOMC minutes to be released on Wednesday and ECB meeting minutes released on Thursday. Later on Thursday, FX markets get a pivotal release of Japanese inflation for the month of January.
- The US Dollar continues to hold on to Friday gains after DXY posed a bullish engulfing candlestick on Friday. This formation comes after fresh three-year lows in USD, begging the question of whether the deep oversold nature of the US Dollar may allow for a continuation of gains after what’s been a brutal past 13 months.
- 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.
If you’re looking for longer-term analysis on US Stocks, the Euro or the U.S. Dollar, click here for our Trading Guides.
US Dollar Strength Continues After Friday's Bullish Engulfing
Last week was another rough outing for the US Dollar, as the US currency sank to another fresh three-year low, even as inflation out of the US came-in above the Fed’s target of 2% for the fifth consecutive month. Normally, a print of this nature would equate to some element of strength in the representative currency as markets factor-in a higher probability of increased rates on the basis of that new, higher inflation. But – not only did that not happen last week; but that US inflation print appeared to trigger the opposite – aggressive selling in the Greenback until buyers came-in to produce a Friday rally off of the lows. That Friday rally was rather impressive, producing a bullish engulfing candlestick that has, thus far, continued to help produce gains in the early-portion of this week.
US Dollar via ‘DXY’ Four-Hour Chart: From Fresh Lows on Friday to Early-Week Rally
Chart prepared by James Stanley
FOMC Minutes Set to Be Released on Wednesday
The big item out of the United States this week is the release of FOMC minutes on Wednesday. While this could bring some volatility into American markets, the January Fed meeting had no major announcements or changes, so it’s not likely that we’ll see any pulse-ripping trends here. However, the minutes being released are from Chair Yellen’s final meeting atop the bank and there could, perhaps, be some items of interest for markets.
Notable from the final Yellen meeting at the FOMC is how equity markets reacted. Equities sold-off the day before the FOMC announcement, and then produced a Doji on Fed day. After hanging on the ropes on the following Thursday, Friday delivered a punch that we still haven’t fully recovered from.
S&P 500 Daily Chart: US Stocks Yet to Recover to January FOMC Levels
Chart prepared by James Stanley
Japanese Inflation, ECB Minutes Highlight This Week’s Economic Calendar
Outside of the States, there are a couple of key economic releases for FX traders to work with. Thursday morning brings ECB meeting minutes from the February meeting, and later that night (Friday morning in Asia), we get Japanese inflation for the month of January.
DailyFX Economic Calendar - High-Impact Events
prepared by James Stanley
Both of these releases speak to rather important themes populating in Forex markets at the moment, as last week brought significant Yen strength even as BoJ Governor Haruhiko Kuroda was re-appointed for a second term, and the Euro continues to hold on to 2017 gains after a surprisingly strong year. Despite the differences, the question surrounding both economies (and Central Banks) is very similar, and that boils down to: When will the Central Bank be ready to walk away from QE?
Will ECB Meeting Minutes Bring Bulls to the Bid?
In Europe, we’ve seen this theme driving Euro-gains for almost a full year now. The European Central Bank has repeatedly said that they’re not yet at the point of proffering taper or stimulus plans, but that hasn’t stopped markets from buying the Euro in anticipation of as such. Last year, Mario Draghi’s dovish claims appeared to bring a diminishing marginal effect: Hampering the Euro around ECB rate decisions in April and June, only for those same dovish leanings to produce an aggressive rally in July.
Even when the ECB elected to extend stimulus in October, the currency faced a mere two weeks of weakness until bulls came back to the bid after a robust German GDP report in mid-November.
EUR/USD Daily Chart: Will Bulls Be Able to Retain Control?
Chart prepared by James Stanley
January finally started to see some shift: Early in the month, meeting minutes from the December ECB rate decision showed that the bank had at least started to look at changing their forward guidance. This would be thought of as a first step away from stimulus as the bank begins to prepare markets for a shift in their stance. A couple weeks later, at the January ECB rate decision, EUR/USD caught a major shot-in-the-arm, re-approaching the 1.2500 psychological level, even as the ECB and Mario Draghi remained rather evasive on the topic of stimulus exit.
Thursday morning brings us the minutes from that meeting, and the big question is whether or not this will be another bullish stampede as markets try to get in-front of an eventual ECB stimulus exit. Or – on the other side of the argument, is an oversold US Dollar clawing back from a recent sell-off going to be enough to keep EUR/USD heading-lower. Price action in EUR/USD is currently testing through a short-term area of support.
EUR/USD Four-Hour Chart: Slipping Below Short-Term Support, Subordinated Support Applied
Chart prepared by James Stanley
Japanese Inflation to Set the Tone in the Yen
The forces of inflation are at work in the Eastern part of the world, as well, as Japan saw its first month of inflation above one-percent in December in almost three years. This was the strongest inflation seen in the economy in 33 months, and matters in the Yen haven’t really been the same since that print came-out.
Japan CPI Rises to One-Percent For First Time in 33 Months in December, 2017
Chart prepared by James Stanley
And while December could potentially be written as a one-off given that it’s the only month last year that printed above .7%, the growth in core inflation is rather undeniable as last year saw a steady stream of gains, further pointing to the continued impact of stronger inflation in the Japanese economy.
Strong, Consistent Up-Trend in Core Inflation out of Japan
Chart prepared by James Stanley
Making matters more interesting around the Yen as we approach this inflation print is the fact that last week brought what should’ve been a drive of Yen-weakness to the table. BoJ Govnernor, Haruhiko Kuroda, was re-appointed for a second five-year term atop the bank. Mr. Kuroda is the architect of Japanese stimulus as he and Prime Minister Shinzo Abe instituted the strategy after Mr. Abe’s election. Another term for Mr. Kuroda was largely looked at as more of the same, which is persistent and heavy stimulus until the Japanese economy moves towards that 2% inflation target.
Despite that re-appointment, the Yen spent most of last week seeing strength; and later this week we get January inflation out of Japan. This will likely be a big push point for the currency until we hear from the BoJ in the second week of March. At that point, the BoJ could brush aside these stronger rates of inflation to recommit to stimulus; but until then, we’re likely going to see some element of markets attempting to deduce when QE in Japan may come to an end.
In USD/JPY, the currency is bouncing from the support side of a multi-year symmetrical wedge.
USD/JPY Weekly - Bouncing From Symmetrical Wedge Support
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the Euro, the British Pound 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, USD/JPY, AUD/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
To receive James Stanley’s analysis directly via email, please SIGN UP HERE
Contact and follow James on Twitter: @JStanleyFX
