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EUR/USD Bull-Flag in Play as Fed Chair Yellen Offers Zero Guidance

EUR/USD Bull-Flag in Play as Fed Chair Yellen Offers Zero Guidance

David Song, Strategist

Talking Points:

- EUR/USD Bull-Flag in Play as Fed Chair Yellen Offers Zero Guidance.

- USD/CAD Bearish Sequence Vulnerable to Dismal 2Q Canada GDP Report.

- Sign Up for the DailyFX Trading Webinarsfor an opportunity to discuss potential trade setups.

DailyFX Table

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.1874

1.1877

1.1774

75

103

EUR/USD breaks out of the narrow range from earlier this week as Fed Chair Janet Yellen offers zero guidance for monetary policy, with the pair at risk for a larger advance as a continuation pattern appears to be in play.

See how shifts in USD/CAD retail positioning are impacting trend- Click here to learn more about sentiment!

The remarks coming out of the Kansas City Fed Economic Symposium in Jackson Hole, Wyoming suggests the Federal Open Market Committee (FOMC) is in no rush to raise the benchmark interest rate as Chair Yellen merely notes ‘any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.’ At the same time, Dallas Fed President Robert Kaplan, a 2017-voting member, warns that the terminal Fed Funds rate is closer to 2.5% even as the committee anticipates to shrink the balance sheet relatively soon, and a growing number of central bank officials may forecast a more shallow path for the interest rate as inflation continues to run below the 2% target.

In turn, Fed Fund Futures now highlight a 40% chance for a move in December, with the dollar at risk of facing a more bearish fate over the coming months as the FOMC softens its hawkish tone.

Keep in mind, European Central Bank (ECP) President Mario Draghi is scheduled to speak this afternoon, but the remarks may largely mimic the speech from earlier this week as the Governing Council plans to decide the fate of the quantitative easing (QE) program in autumn.

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Topside targets are back on the radar for EUR/USD as the 1.1670 (50% retracement) region provides support, with the pair clearing the narrow range from earlier this week.
  • A bull-flag appears to be in play, with a break of the monthly-high (1.1910) raising the risk for a more meaningful run at the 1.1960 (38.2% retracement) hurdle, which lines up with the gap from January-2015 (1.2000 down to 1.1955).
  • Will monitor the Relative Strength Index (RSI) following the bullish trigger from earlier this month, with a move above 70 raising the risk for a further advance in the euro-dollar exchange rate.

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

USD/CAD

1.2494

1.2540

1.2485

26

55

USD/CAD initiates a bearish sequence following the Kansas City Fed Economic Symposium, but Canada’s 2Q Gross Domestic Product (GDP) report may derail the near-term decline in the exchange rate as the growth rate is anticipated to slow to an annualized 3.1% from 3.7% during the first three-months of 2017.

Another below-forecast reading may sap the bullish sentiment surrounding the loonie as it encourages the Bank of Canada (BoC) to keep the benchmark interest rate on hold at the September 6 meeting, and the central bank may stick to the sidelines throughout the remainder of the year as ‘CPI inflation has eased in recent months and the Bank’s three measures of core inflation all remain below 2 per cent.’ However, a positive development may boost the appeal of the Canadian dollar as it puts pressure on Governor Stephen Poloz and Co. to further normalize monetary policy sooner rather than later. In turn, the shift in USD/CAD behavior may continue to gather pace over the remainder of the year especially as market participants scale back bets for three Fed rate-hikes this year.

USD/CAD Daily Chart

USD/CAD Daily Chart

Chart - Created Using Trading View

  • Near-term outlook for USD/CAD remains tilted to the downside as it extends the series of lower highs & lows from earlier this week, with a close below the 1.2510 (78.6% retracement) hurdle opening up the next region of interest around 1.2410 (100% expansion) to 1.2440 (23.6% expansion), which lines up with the 2017-low (1.2413).
  • May see a broader decline in the exchange rate as a bear-flag appears to be panning out; keeping a close eye on the Relative Strength Index (RSI) as it works its way back towards oversold territory, with a break below 30 raising the risk for a further decline in USD/CAD as the bearish momentum gathers pace.

Retail Sentiment

Retail Sentiment
  • Retail trader data shows 29.1% of traders are net-long EUR/USD with the ratio of traders short to long at 2.43 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06841; price has moved 11.1% higher since then. The number of traders net-long is 5.4% higher than yesterday and 7.5% higher from last week, while the number of traders net-short is 6.0% lower than yesterday and 10.6% higher from last week.
  • Retail trader data shows 69.0% of traders are net-long with the ratio of traders long to short at 2.23 to 1. In fact, traders have remained net-long since Jun 07 when USDCAD traded near 1.3446; price has moved 7.1% lower since then. The percentage of traders net-long is now its highest since Aug 17 when USDCAD traded near 1.26794. The number of traders net-long is 2.9% higher than yesterday and 30.9% higher from last week, while the number of traders net-short is 12.8% lower than yesterday and 13.6% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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

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