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Q2 Themes: USD Triangle, EURUSD Range, Risk Aversion in Stocks, Yen

Q2 Themes: USD Triangle, EURUSD Range, Risk Aversion in Stocks, Yen

2019-03-29 13:02:00
James Stanley, Currency Strategist
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US Dollar, EURUSD, USDJPY, S&P 500 Talking Points:

- Today is the final trading day of what’s been a busy quarter, and this has been the strongest quarter for the S&P 500 since 2009, which comes on the heels of the a Q4 sell-off that marked the worst quarter since 2011. It’s rare to see that type of volatility expansion, and this maybe telling market participants something to watch for in the remainder of this year.

- The impasse in currency-land has continued as both the US Dollar and EURUSD remain mired in varying forms of congestion. In the US Dollar, the ascending triangle has been building throughout this year, and this points to bullish potential in the currency. Meanwhile, EURUSD remains in a range-bound formation that’s held through an Italy-Brussels debt stand-off, an announcement of stimulus-exit, and then an announcement of fresh stimulus. Will this range finally give way in Q2?

- DailyFX Forecasts are published on a variety of currencies such as the US Dollar or the Euroand 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 Finishes Q1 Higher, But Longer-Term Congestion Remains

It’s been a busy quarter across global markets and as the Q2 open nears, the US Dollar remains in the ascending triangle formation that’s been building since last year. A January loss in the US Dollar was recovered in February and March: But sellers wouldn’t allow for a top-side breakout of the November and December swing-highs, keeping the 97.70 area of the chart as the yearly high in the currency.

US Dollar Daily Price Chart

us dollar usd daily price chart

Chart prepared by James Stanley

Last week’s FOMC rate announcement brought in an initial move of aggressive weakness, with USD posing a fast drop down to a support trendline that connects the September and January swing lows. Buyers came back at that point, and they’ve continued to drive in the week since, with prices in DXY moving back to the late-January swing-highs around 97.21-97.30; keeping that ascending triangle formation alive and producing a net-move of strength after the March FOMC rate decision, even as the bank made a dovish move by cutting rate forecasts for 2019.

US Dollar Four-Hour Price Chart

us dollar usd four hour price chart

Chart prepared by James Stanley

The big question around the Dollar at this point is what else the Fed might be able to do to compel a bearish move? The ECB just launched another round of stimulus, and going by Mr. Draghi’s comments yesterday morning, the European Central Bank is unlikely to move away from an extremely cautious stance as growth and inflation have both started slowing in the bloc. Japan remains at full throttle, and China has been pumping in stimulus, as well. This makes for a difficult backdrop around the Fed because, even with last week’s dovish move, they’re still one of the more hawkish Central Banks across the global landscape, at least for now.

Which brings up another item of interest, and that is EURUSD.

EURUSD Range Remains Through QE Announcement: Q2 to Bring a Break?

It’s been a climactic five-month period around the Euro-Zone, including a debt stand-off between Italy and Brussels; going along with an announcement of stimulus exit which was followed just a few months later by an announcement of fresh stimulus. But for all the fits and starts, EURUSD has spent most of that time trading in a range-formation that has yet to give way.

EURUSD Daily Price Chart

eurusd eur/usd daily price chart

Chart prepared by James Stanley

This theme was in full-view earlier in the month around that announcement of fresh stimulus. EURUSD even temporarily-tipped below the support level at 1.1215 that had previously held the November low, but as discussed in the webinar following the announcement, EURUSD found support at another key level just a little lower around the 1.1187 level, which is the 61.8% Fibonacci retracement of the 2017-2018 bullish move.

EURUSD went into bull-mode after that, running-higher for the next week-and-a-half; again, producing a net move of strength after a dovish move at the representative Central Bank. That theme lasted all the way until EURUSD perked up to the 1.1448 resistance level, and that very much synced with the bearish move in the US Dollar around last week’s FOMC rate decision.

But, just as seen above in the US Dollar, EURUSD continued to reverse in the aftermath of that rate decision, and prices are now digging deeper within that longer-term zone of support.

EURUSD Four-Hour Price Chart

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

Q4 Weakness into Q1 Strength

The big item of interest so far in 2019 has been a screaming return of the risk-on trade. Q4 was marked by a vicious reversal as sanguine market themes in US equites posed a violent turn around some comments from FOMC Chair, Jerome Powell. That theme of weakness lasted from the early-October period all the way into Christmas, at which point stocks started to try to cauterize the lows. But, as the door opened into 2019, the risk trade was back in a very big way, and January and February produced very strong showings in US equities.

At this point, the S&P 500 is on the verge of finishing off its strongest quarter in a decade. And this comes after one of the worst quarters in the past decade, making for a stark contrast in behavior over the past six months.

This theme did hit a bit of a stumbling block around last week’s FOMC rate decision, however; and even as the bank went dovish in their forecasts, which would generally be a positive for the risk trade, the S&P 500 turned-lower and has yet to fully recover. The big question for Q2 is which of these themes remains prominent? Will Q1 strength continue as investors push the risk-off trade with a backdrop of dovishness from Global Central Banks? Or – will the Q4 theme of weakness make a return as stocks stumble on growth concerns?

S&P 500 Daily Price Chart

SPX500 Daily price chart

Chart prepared by James Stanley

Yen for Risk-Themes in Q2

Going along with the themes showing in stocks, USDJPY has had a bifurcated quarter of price action; coming into the period screaming-lower as Yen-strength was pushed by risk aversion themes in the opening days of Q1. But, as risk-on themes started to price-in, USDJPY began to recover and spent most of the next three months moving higher.

Until last week’s FOMC rate decision, that is, at which point the pair turned-lower and broke through a few different areas of support. Buyers finally returned at a deeper support zone, around the 109.67-110.00 area on the chart, and that has since helped to hold the lows. But -as of yet, buyers have been unable to break above the lower-high and bearish potential remains in the pair, particularly if the risk aversion theme comes back with strength in Q2.

USDJPY Eight-Hour Price Chart

usdjpy usd/jpy eight hour 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 an abundance 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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