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Forex Talking Points:

- The US Dollar is showing mean-reversion tendencies near resistance, and the Euro has pulled-back from the sell-off that punctuated this week’s open as we approach tomorrow’s release of September inflation numbers out of the United States. The expectation is for a 2.4% print, so the bar is set very low considering last month’s 2.7% and the June and July prints of 2.9%.

- Risk aversion is a bit more quiet this morning in FX-land as both the US Dollar and the Euro have cooled; but selling pressure remains in European stocks as shown in the DAX. We’re not yet out of the woods on the scenario surrounding Italy, so much attention will likely be paid to European markets in the coming weeks to see whether risk aversion themes continue, or whether we see markets step back from the proverbial ledge as was seen in the May/June and again in mid-August.

- 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.

US Dollar Holds Support Ahead of CPI

Tomorrow morning brings to markets the big item on this week’s economic docket, and that’s the release of September inflation numbers out of the United States. There’s been quite a bit of encouragement around this theme of late as inflation has continued to hold at-or-above the Fed’s 2% target now for 11 months. The bigger question is whether continued inflationary strength in the US will actually push the value of the Dollar higher, as the recent topside run in USD appears to be more-driven by dynamics of risk aversion than it does monetary policy implications.

Last month saw the first moderation in the indicator since December of last year. We were on a steady track of growth higher until last month printed at 2.7% versus a 2.8% expectation, and that was released on the heels of two consecutive months at 2.9% in June and July. Tomorrow is expected to bring more of the same, as September CPI is expected to print at 2.4%.

US Inflation Remains Above 2% Target, Moderation Expected

us cpi by month us inflation

Chart prepared by James Stanley

The big driver of Dollar strength of recent has appeared to emanate out of risk aversion, specifically looking at dynamics in Europe and around the Euro as concerns around Italy have continued to grow. This isn’t the first time that we’ve seen these concerns driving prices, as the April-May sell-off in the Euro was very much driven by fears around Italy. At the time, two Euro-Skeptic parties were elected to power in Italy, and the backdrop started to build for a showdown between Italy and the European Commission.

At issue is Italy’s budget. The EC wants to limit Italy’s 2018 budget to a 1.6% deficit. The Italian government wants a 2.4% deficit so that they can use extra funds to rebuild infrastructure and institute growth-oriented initiatives.

The big issue around the budget is Italy’s debt, as the European Commission wants to see debt at 60% of GDP at a max. Italy is nearing two times that amount. So, if the country is going to continue running larger deficits, that would require additional debt to fund those budgets, and that brings even more risk of even more leverage with an larger Debt-to-GDP ratios.

This tension has taken a toll on the Euro and, in-turn, pushed the US Dollar up to fresh highs. EUR/USD pushed down to a fresh seven-week-low to start this week; and over the past 24 hours prices have posed a pullback in that bearish trend. At this point, we’re currently seeing prices hold at resistance inside of the 1.1530 level.

EUR/USD Four-Hour Price Chart

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

EUR/JPY Approaches Showdown at Confluent Resistance

We looked into this as part of our FX Setups of the Week. EUR/JPY had built into a descending triangle formation inside of a longer-term bull flag, and shortly after the open of this week the bearish setup from the triangle break triggered as prices ran down to fresh three week lows. Prices continued to slide on the support side of the channel that made up the bear flag formation, and after catching a bounce yesterday, prices have started to move towards the resistance side of that formation.

This is setting up a showdown at a big zone. The area of prior support that runs from 130.58-130.77 is now confluent with the resistance side of the channel. A hold of resistance here keeps the door open for short-side strategies. But – if we break above, we may soon be looking at a return of strength as a topside break of a brewing bull flag formation would re-open the door for bullish strategies.

EUR/JPY Four-Hour Price Chart

eurjpy eur/jpy four hour price chart

Chart prepared by James Stanley

US Dollar: Mean Reversion in DXY as Support Holds Above 95.53

The Dollar’s pullback from yesterday held support above the key level of 95.53 – but bulls were also unable to hold the prior swing-low from around 95.68 which would’ve kept the door open for short-term trend strategies. At this point we have a range near resistance punctuated by yesterday’s seven-week highs.

US Dollar Hourly Price Chart

us dollar usd hourly price chart

Chart prepared by James Stanley

GBP/USD: Cable Strength Holds as Prices Near Key Resistance

The British Pound continues to show signs of strength, particularly during those period of USD-weakness over the past week while that range has been building near resistance. This has helped to push GBP/USD up to an area that had previously produced resistance in late-August. Bulls appear to be facing a bit of pressure off of that zone after failing to push through yesterday, and this keeps the door open for a pullback down to prior support to keep the door open for topside approaches.

GBP/USD Hourly Price Chart

gbpusd gbp/usd hourly price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q4 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