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Talking Points:

- The Bank of Canada hosts a rate decision at 10 AM ET this morning, and this is followed by the European Central Bank on Thursday morning and the Bank of Japan reporting later on Thursday night (Friday morning in Asia).

- As USD-weakness comes back into the fold, strength in both the Euro and the Yen come into the spotlight ahead of the respective rate decision, and it would appear as though both banks are in similar spots albeit with different timelines. In EUR/USD, bulls remain in-control as we saw for much of last year as market particpants try to position in-front of a taper or a move away from stimulus. This theme has recently gotten started in Japan after inflation jumped in December and January, and Yen-strength remains a viable theme as we approach Thursday’s Bank of Japan interest rate decision.

- 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, Stocks Fall on Cohn Departure Announcement

Yesterday’s surprise announcement of departure from White House Economic Advisor Gary Cohn took many by surprise, and this led to a bump-lower to both US equities and the US Dollar. The announcement came later in the day after the US Dollar had already started to put in bearish cues earlier in the session. The S&P 500, however, saw a 45-handle sell-off following the Cohn announcement before finding a bit of support around 2684, which had helped to provide a swing-low in latter-February. Since that support came-in overnight, prices have bounced up to another level of relevance: The 50% Fibonacci retracement of the February sell-off resides at 2703, and is currently finding some sellers around this level.

S&P 500 Four-Hour Chart: 40+ Handle Sell-Off Following Cohn Announcement Finds Support ~2680

s&p 500 four hour chart

Chart prepared by James Stanley

USD Bears Drive Further

The US Dollar had already started another bearish move earlier on the day, and the Cohn announcement brought on more sellers as DXY sank below 89.50 briefly before buyers showed around 89.40. We’ve been largely range-bound ever since, with price action oscillating between the levels of that 89.40 support combined with some resistance coming-in around 89.60-89.65. This keeps the door open for short-side strategies in the US Dollar, as bulls have been unable to defend last week’s higher-lows after another test above the 90.00 level on DXY.

US Dollar via ‘DXY’ Four-Hour Chart: Feb Bullish Trend Broken, Resistance Potential ~89.90

us dollar four hour chart

Chart prepared by James Stanley

EUR/USD Extends Support Bounce Ahead of ECB

Tomorrow’s calendar brings two rate decisions of relevance, with the European Central Bank set to announce their decision tomorrow morning. As has become the norm around the ECB, little is expected by way of new information. And given the bank’s sensitivity to Euro-strength, it’s also unlikely that we’ll get any formal declarations of stimulus exit or tapering strategies or anything like that. Around the ECB, the devil is in the details, as market participants will be looking to gleam any possible signs that stimulus exit may be on the horizon. We had the initial shift show at the January rate decision after the release of ECB meeting minutes, and this has helped to keep the single currency strong. But – given a continuation of USD weakness helping to keep EUR/USD elevated, this may be a sore spot for the bank that we see them try to avoid altogether, much as we’ve been witness to over the past year.

If weakness does develop in the Euro around tomorrow’s ECB rate decision, the door can open to some interesting bullish continuation themes in the currency. EUR/USD ran into Fibonacci support last week, and since then bulls have taken-charge. Prices are fast nearing a batch of resistance that hasn’t yet shown a willingness to yield around the 1.2500 psychological level. Prior support areas of 1.2335-1.2350, 1.2281 and 1.2210 can be operable for aims of bullish continuation.

EUR/USD Four-Hour Chart: Extension of Support Bounce, Possible Higher-Low ~1.2335-1.2350

eurusd four hour chart

Chart prepared by James Stanley

For those that are looking at a short-stance in the Euro, greener pastures may be available away from the US Dollar. The complication behind bearish EUR/USD strategies is the prospect of having to hold long USD exposure. But, for traders that are comfortable with being long Japanese Yen, the short-side of EUR/JPY may be more attractive for bearish strategies in the Euro.

EUR/JPY rallied up to find a bit of resistance around a prior area of support, using the 50% Fibonacci of the 2014-2016 major move for assistance.

EUR/JPY Four-Hour Chart: Rally to Resistance, Prior Support

eurjpy four hour chart

Chart prepared by James Stanley

USD/JPY Pinned to Support Ahead of BoJ

The Japanese Yen has seen quite a bit of change this year, as that prior theme of Yen-weakness has appeared to have lost its luster. This is being driven by rising inflation in Japan, similar to what was seen in the Euro last year as stronger growth created bullish drive in the single currency as market participants geared up for an eventual exit from stimulus. While we’re still waiting for some formal announcement out of the ECB, this theme appears to have already gotten underway around the Japanese Yen; and the BoJ has a rate decision on Thursday night in which we might get some clues as to how the bank anticipates molding policy moving-forward.

In January, inflation came-in at 1.4%; getting quite a bit closer to the BoJ’s 2% goal. Inflation expectations around the BoJ have been a bit dramatic since the introduction of Abe-nomics, but the BoJ had pushed back the timeline to reach their 2% inflation goal on six different occasions; most recently in July of last year when they said that they expected to hit 2% in the year 2020.

Since that announcement, inflation has been on a steady track-higher, with December coming-in at one-percent and January printing at that 1.4% number. The rate of change here is impressive.

Japanese CPI Hits 34-Month High in January at 1.4%

Japan Monthly CPI

Chart prepared by James Stanley

On a related note of consistency, the steady growth that’s shown in Core CPI is nothing to scoff at, as a clean trend has developed here that watched Core CPI move from -.1% in January of last year up to three consecutive months at .9%.

Japanese Core Inflation: Steady, Consistent Trend Throughout 2017 into 2018

Japan Core Inflation

Chart prepared by James Stanley

This boost to inflation has come-along hand-in-hand with a tonality change in the Japanese Yen. Despite the Greenback’s weakness in 2017, the Japanese Yen paced-along; producing range-bound behavior for the final nine months of last year. But, as we opened the door to 2018 Yen-strength became more visible, leading to a strong down-trend that soon broke down to fresh yearly-lows.

USD/JPY Daily: After Nine Months of Back-and-Forth, Yen Bulls Show Their Hand

usdjpy daily chart

Chart prepared by James Stanley

As Yen-strength has continued in a rather persistent fashion, longer-term levels of support have started to come into the equation, including the support side of a symmetrical wedge formation that’s been building for a couple of years now. A bit of secondary support is showing just underneath that trend-line projection, coming in around the 23.6% retracement of the 2015-2016 major move in the pair.

USD/JPY Weekly: At an Interesting Juncture Ahead of BoJ

Please add a description for the image.

Chart prepared by James Stanley

The big question around the BoJ as we approach the March rate decision is what they might be able to say that could help to bring back Yen-weakness. The bank’s QE program is already rather stretched after massive outlays over the past five-plus years. They’ve already accumulated a large chunk of the Japanese Government Bond market, on top of a massive basket of stocks, both international and Japanese. And they may want more ‘wiggle room’ should risk aversion rear its ugly head again, forcing the bank into action. This may not be the time to make radical changes or alterations or even allusions to as such from the BoJ, and this can help to keep Yen-strength on the table until something changes.

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

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