Price Action Talking Points:
- This has been a peculiar month of December thus far as seasonality trends have been flipped on their heads. Yesterday produced a wild swing in US equities in which a deep loss turned into a gain ahead of the session close, and that volatility has shown no sign yet of letting up. Taking a step back to look at longer-term charts, there has been a clear shift in Q4, starting just after fresh all-time-highs in US equities in the first few days of the fresh quarter, and on the heels of some hawkish comments from FOMC Chair, Jerome Powell.
- The Fed did get more dovish at last week’s FOMC rate decision, but perhaps not quite to the degree of what equity bulls were looking for. The bank forecast two hikes for 2019 in contrast to the September projection that was looking at three; but this didn’t seem to satisfy the long risk trade as stocks plummeted in the aftermath of that rate decision. That sell-off continued into Christmas, and the Wednesday bounce came under fire during yesterday’s volatility. At this point, it appears that a primary source of this recent strength is short-cover ahead of year-end; and there’s no evidence yet to suggest that the volatility that showed up around the Q4 open is yet ready to abate. This has had a noticeable impact in DailyFX Top Trades for 2019, a number of which are looking at either long-Yen or short-risk.
- DailyFX Forecasts have been published for Q1, 2019 on a variety of currencies such as the US Dollar or the Euro and 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.
The Q4 Risk Shift Remains in-Focus as 2019 Open Nears
The final few trading days of 2018 are here and next Wednesday, the page will turn into 2019. With US stocks looking at a red close on the calendar year and with Fed policy squarely in-focus, next year will likely carry over the excitement that showed up in Q4 as there hasn’t yet been a show of calm across risk markets. US equities have continued to swing wildly into this year’s close and this begs the question as to how long the Fed can remain as the sole major Central Bank actively pushing tighter policy. The combination of balance sheet reduction, as discussed earlier this morning by my colleague Justin McQueen, along with continued rate hikes have produced a tighter operating environment in the United States.
That tightening has started to take its toll on the risk trade that remained fairly resilient through the first couple of years of the current rising rate cycle; but as the dual forces of both higher rates and balance sheet reduction have played out, risk tolerance has waned as focus has moved squarely over the Federal Reserve. And given the timing of moves in Q4, this appears to carry a strong weight in market participants’ minds.
The US equity sell-off got started on October 3rd, just after setting fresh all-time-highs and on the heels of a speech from FOMC Chair Jerome Powell in which the head of the bank said that the Fed was ‘a long way’ from the neutral rate. This was heavily inferred to mean that the Fed had plans for quite a few more rate hikes ahead, and in short-order US stocks were tipping over. That pain has largely lasted ever since, save for two recovery bounces that showed in late-October and late-November, both of which happened to show around supportive comments from Fed members. In late-October, it was Mr. Clarida, the newly-installed Vice Chair and in November this came from Chair Powell when he presented the bank’s proximity to the neutral rate in a different light, saying that the FOMC was ‘just under’ this rate.
Dow Jones Weekly Price Chart with (14) ATR Applied: Rising Volatility Throughout the Quarter
Chart prepared by James Stanley
Anticipation was built for last week’s Fed meeting, as the wide expectation was that the bank would soften their hawkish focus while hiking rates for the fourth time this year. And the FOMC did just that, although perhaps not to the degree that Equity bulls were wanting for, and stocks fell over after that rate decision and the descent largely continued through the Christmas holiday.
The past two trading days have produced recovery bounces, and that bounce looks set to continue with futures pointing higher this morning ahead of the US equity open. But, it doesn’t appear as though there’s enough evidence yet to produce the prospect of the equity slump being over; as the strength seen since Christmas may very well be short-cover ahead of year-end.
At this stage, prices in the Dow are at an interesting area, finding a bit of resistance off of the prior 2018 lows, which happens to come-in around the 38.2% Fibonacci retracement of the post-Election move in the index.
Dow Jones Daily Price Chart: Resistance at Prior Support, Taken from Previous 2018 Lows
Chart prepared by James Stanley
The S&P 500 has a similar backdrop in which prices have put in a rather vigorous bounce following the earlier-month FOMC-fueled plunge. Prices in the index bounced after a test of the 50% marker of the 2016-2018 major move, and price action is now testing resistance at the 38.2% marker of that Fibonacci study.
S&P 500 Weekly Price Chart: Resistance at 38.2% Marker of 2016-2018 Major Move
Chart prepared by James Stanley
US Dollar Chop Continues Post-FOMC
In currencies, that FOMC rate decision from last week has produced considerable indecision around the US Dollar. The currency continues to test a key area of support on the charts, taken from the 23.6% Fibonacci retracement of the 2011-2017 major move but, as yet, has failed to produce any notable trends in DXY itself. There have been attractive spots, however, such as the USD/JPY setup that I’ve been looking at over the past couple of weeks.
Q1 Forecasts have been released for 2019, and I contributed to the Technical forecast for the US Dollar, along with John Kicklighter’s Fundamental forecast for the currency. Those are now available completely free-of-charge from the below link, and in my portion I was looking for the US Dollar to soften going into next year, looking for a pullback after the bullish trend began to gyrate in the second-half of Q4.
US Dollar Daily Price Chart: Messy Post-FOMC
Chart prepared by James Stanley
EUR/USD Continues Congestion as Year-End Nears
Going with that lack of direction in the US Dollar over the past couple of months has been continued congestion in EUR/USD. While the pair came into the quarter plunging lower on the back of fears around the potential stand-off between Italy and the European Commission, the past couple of months have produced a couple of notable items that may help to reverse the single currency’s course on a bigger-picture basis.
Earlier this month, the ECB made the formal announcement ending bond buying as part of the bank’s QE program. And then last week, perhaps lost in the shuffle around that FOMC rate hike, a détente was reached between Italy and the European Commission on the Italian budget. This has helped to perk EUR/USD up to a key resistance zone that’s been in-play for most of Q4 that runs from 1.1448-1.1500. As discussed in this week’s FX Setups, a topside break above this zone can make the prospect of bullish themes in the pair look considerably more attractive; and that theme will remain of interest as the page turns into 2019.
EUR/USD Daily Price Chart: Resistance Zone Tested Again
Chart prepared by James Stanley
Yen Strength Shows Up in December
As mentioned above, there have been specific areas in which the US Dollar has shown trends, and USD/JPY is a prime example. This is largely being drive from Yen-strength on the back of continued risk aversion, and the pair has put in a bounce from the key psychological level of 110.00, as discussed in this week’s FX Setups. I had started looking at short-side plays in the pair a couple of weeks ago when the pair was above the 113.00 handle, and since then prices have continued to slide in USD/JPY as Yen-strength has taken over.
This is an item of interest for 2019, as the Bank of Japan may not be able to continue with business as usual with their pedal-to-the-floor QE program. This came to light this week in some comments from BoJ Governor, Haruhiko Kuroda, in which he said that the bank would proceed ‘step by step towards achieving its price target,’ which is a moderation of the previous language that denoted that the bank would try to attain this goal as soon as possible.
With Europe now winding up their bond purchases and the US in the full-throttle of a dual tightening cycle, the Bank of Japan may not be able to remain pedal-to-the-floor for long, particularly given their history of failure in attaining the elusive 2% inflation target. This had a noticeable impact on DailyFX Top Trades for 2019, as a number of analysts and strategists, myself included, are looking for a continuation of Yen-strength into the New Year.
USD/JPY Daily 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
