Talking Points:
- It’s been an eventful week across global markets and clarity has been evasive. The Fed hiked rates for the second time in 2018 while warning that two more were on the way; but this was offset by a report that began to circulate during the FOMC press conference that the US will impose additional tariffs on China. The following morning’s ECB rate decision helped to reverse that USD move, and the currency is now testing seven-month highs as EUR/USD posed a deep bearish move, and this is being exacerbated by the prospect of even more political risk in Europe, this time from Germany.
- The primary takeaways from this week’s price action has been US Dollar strength while both the Euro and US stocks took on added pressure. Given the context of these themes, this has the potential to continue that move of USD-strength, along with Euro-weakness. More questionable, however, is a deeper pullback in US stocks; we looked at a bearish reversal setup in the Dow Jones earlier this week and that’s played out so far as the Dow is back-down and testing the 25k level ahead of the Friday open.
- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re 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.
Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.
A Busy Week of US, Euro Drivers With Some Additional Surprise
It’s been a big week across global markets. The Fed hiked rates for the second time in 2018, but the US Dollar actually went down in the immediate aftermath of that move. The likely culprit was an announcement with some interesting timing, as word began to spread that the US was going to add tariffs to an additional $50 Billion worth of goods from China. This report began to circulate as Jerome Powell was speaking during the press conference, and this helped to push the US Dollar lower after the Fed hiked rates while warning that two more may be on the way in 2018.
That US Dollar weakness didn’t last for long, however, as the ECB rate decision the following morning reversed all of that move and quite a bit more. The ECB finally announced stimulus exit, but they did this in about the most dovish manner possible, warning that rates would stay at current levels ‘at least through the summer’ of next year. This disappointed expectations for a rate hike next year, as odds for a hike in June 2019 went from above 70% before ECB to below 6% shortly after. This produced a rather visible move of Euro weakness, and deductively this drove US Dollar strength as capital flows shifted back to the US.
But that’s not all: Exacerbating that move of Euro weakness was another fresh bout of political risk as we may be heading towards a round of snap elections in the European stalwart of Germany. The German coalition between the CDU and CSU appears on the verge of collapse over immigration. This weekend will most likely be filled with the German Chancellor attempting to cut a deal, but this remains as a considerable risk to near-term prices in the single currency. For more background behind this brewing political saga, our own Justin McQueen discussed it in greater detail earlier this morning in the article, Euro Bears to Remain in Control on Possible German Snap Election.
So with some of the dust settled, what we have appears to be a Federal Reserve looking to hike rates five more times by the end of next year, while the ECB might be able to push for one. We have politically-fueled drivers on either side of the coin, with political turmoil in German politics and the brewing ‘trade wars’ or tariffs out of the US. And next week brings even more innuendo as the economic calendar is light on the data front but heavy on the subjective drivers: Mario Draghi has speeches in Sintra, Portugal on Monday, Tuesday and Wednesday; Kuroda gives a speech on Wednesday, and then we get rate decisions out of the Swiss National Bank and the Bank of England on Thursday. With no rate moves expected, the focus will be on the verbiage and, again, the innuendo.
DailyFX Economic Calendar: High-Impact Events for the Week of June 18, 2018
Chart prepared by James Stanley
US Dollar at 2018 Highs with the Door Open for More
The timing of that tariff report around China should not be ignored. The fact that this came out right around the time that the Dollar was popping-higher after the Fed hiked (while also taking on a hawkish stance for the rest of 2018) may just be coincidence; but the fact that there’s a superlative bearish driver is notable regardless. But this mattered little when the ECB spoke to rates, and the way in which this move has priced-in highlights an item of importance: FX markets care less about ECB stimulus exit than they do about rate policy. With the ECB closing the door on the prospect of any near-term rate hikes, this is a theme that could have continuation potential, and relevant to the US Dollar is how the US currency is one of the few being driven by higher rates and tighter policy.
This move of USD strength may have continuation potential, and we’re nearing a critical level for that theme. The Dollar tested the October swing-high earlier today but has so far been unable to break through. If we do get a topside break above 95.15, then we have fresh 11-month highs, and the door is open for a deeper move towards 96.04 and then the area around 98.00.
US Dollar Jumps to Test, Pulls Back From 11-Month Highs at 95.15
Chart prepared by James Stanley
For near-term positioning in the US Dollar, traders can look for a move back to the prior zone of confluent resistance that runs from 94.20-94.30. This area had given a couple of different resistance inflections earlier in June, and if we do see prices pullback to this area, the door opens for topside setups targeting a re-test of those prior highs around 95.15.
US Dollar via ‘DXY’ Four-Hour Chart: Higher-Low Support Potential at Confluent Zone 94.20-94.30
Chart prepared by James Stanley
Euro with Bearish Continuation Potential as Bullish Driver Cast Aside
The Euro was in a hard sell as we traded through the month of May, and this theme began to take a step back from the ledge when reports began to circulate that the ECB was looking at stimulus exit. This was seemingly inferred to be a positive sign around the Euro economy, positing that stimulus exit would soon be followed by higher rates and a normalization of policy; but as we found out yesterday, that is not the plan at the European Central Bank as the ECB wants to keep rates pegged to the floor for at least the next year.
EUR/USD Four-Hour Chart: Bearish Breakout Below a Big Zone of Prior Support/Resistance
Chart prepared by James Stanley
The inclusion of another piece of political risk muddies the water, and can add considerable volatility over the weekend, making matters of near-term positioning a bit more difficult. But on a longer-term basis, the matter of excitement for FX traders (and likely also the ECB) is the potential for the longer-running down-trend to come back into order. Prices are now trading below the 23.6% retracement of the 2008-2017 major move, and this exposes the 23.6% retracement of the 2014-2017 move in the 1.1200 area.
EUR/USD Monthly Chart: Bearish Continuation Potential in Longer-Term Move
Chart prepared by James Stanley
The Big Question: The Risk Trade
One interesting development this week has been a pullback in US stocks. We looked at a reversal setup in the Dow Jones on Tuesday, and that Fibonacci level has helped to push prices back down to the 25k area; but with the Fed now as one of the only games in town for rate hikes, the potential for additional pressure in US issues remains. The Fed was fairly clear in their drive towards normalization this week, and the volatility that showed in stocks after the February pullback did little to deter the world’s largest Central Bank. This is something to keep an eye on as we move deeper into the summer, as rising rate cycles have a tendency to soften and then, eventually, reverse long-term bullish trends in stock indices. With rate hikes now on the cards for both September and December of this year, risk markets may not be as forgiving with subjective drivers like trade tariffs, political turmoil or the possibility of a full-blow trade war.
Dow Jones Daily Chart: Bearish Reversal from 14.4% Fibonacci Resistance After FOMC, ECB
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on 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 USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
Forex Trading Resources
DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.
If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
