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EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

2020-11-04 03:00:00
John Kicklighter, Chief Strategist
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EURUSD, USDJPY, GBPUSD, AUDUSD Talking Points:

  • A bounce in the S&P 500 (as a proxy for risk assets) and slip from the Dollar closed the session before US polls started rolling in – a rebalancing move rather than conviction
  • While there are many variations in the scenarios at the end of the day, I look at the Dollar-based majors from a contested election and a clear outcome
  • EURUSD, the most liquid cross will struggle to break 1.20-1.16, USDJPY will be a play on risk intensity, GBPUSD is distracted and AUDUSD has seen risk interests skewed
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We are smack in the middle of the US election with a broad range of possible outcomes from the hotly contested vote. The depth of scenarios between the winner of the Presidential election and the Legislature (Congress and House) along with the market’s subsequent response to the macro event presents a serious range of possible outcomes. Trading with a sense of certainty against this backdrop – trading for a medium-term outlook – requires a degree of conviction that tends to contradict an appreciation of probability in the scope of risk-reward. In short, I am more than happy to wait until the dust settles before staking any conviction in these markets. That said, there is still some interesting short-term activity through this past session’s active New York trade. Notably, there was a ‘relief rally’ from the S&P 500 and pullback from the DXY Dollar Index. Neither of these would cast conviction in either field but rather trade back more comfortably into established ranges. That can offer a buffer to breakout expectations.

How could US elections impact the markets? Click here to see our aggregate report on themarket reaction to election.

Chart of S&P 500 (Daily)

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Chart Created on Tradingview Platform

A Focus on the Dollar

In the middle of the count and with the results not leaning decisively for either candidate, it is worth revaluating the market that can have he most explicit response to the event given its relative scope: the US Dollar. In the poll we conducted, the assumption has been for a bullish response from the Greenback regardless of whether Trump or Biden won – collectively 72 percent probability from the scenarios. To add to that mix, there is also the possibility of a contested election which can draw out a sense of certainty for days. As such, I split the outlook on the four most liquid ‘majors’ with a comparison of contested and decisive outcomes.

Twitter Poll On Dollar Response on Election Outcome

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Poll from Twitter.com, @DailyFX

EURUSD is the world’s most liquid currency and it also happens to represent one of the most heavily put-upon fundamental pairings as well. Despite the depth of this market, it is still a relative battel for the role of the world’s most reliable reserve. During the early hours of the vote count, we saw this pair trigger its biggest hourly drop since March 19th and the biggest hourly range since August 27th. That is exceptional volatility that reflects the event risk at play. If there is a contested outcome that also triggers *severe* risk aversion, Dollar could rally and drive EURUSD below 1.1600. Given the assumption that the Dollar will advance on a clear outcome for the presidential ticket, it would also seem that a break could occur – now that it has moved back down to support – but I remain dubious of follow through given the pricing in anticipation (‘buy the rumor’). If there is a mix between Executive and Legislative outcomes, the Dollar is likely to come under pressure.

EUR/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -11% 14% 7%
Weekly 2% 25% 18%
What does it mean for price action?
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Chart of EURUSD with 50 and 100-Day Moving Average (Daily)

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Chart Created on Tradingview Platform

The next most interesting Dollar-based pair on my radar is the USDJPY. This is a pair of two ‘safe havens’ which present more nuance than most markets are willing to consider for these currencies – nuance is inconvenient. If there is a severe risk aversion move that urges liquidation, I will look for the same kind of shift seen back in March during the height of the pandemic crisis: a Dollar bid. Alternatively, in moderate risk aversion, the Yen is more likely to gain traction. If stability comes on with a clear outcome – most prominently in a Democrat sweep – a risk appetite and Dollar bid combination can result in a break 106 bullish break.

USD/JPY MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 1% 3%
Weekly -2% -1% -2%
What does it mean for price action?
Get My Guide

Chart of USDJPY with 50 and 100-Day Moving Average (Daily)

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Chart Created on Tradingview Platform

Below is the standings of relative risk representation for the majors. While the Dollar is at the very extreme of my scale, that doesn’t make it simply a situation where the currency is extremely sensitive to every ebb and flow. Rather, it represents a standing that makes it more prone to market response at the extremes of sentiment.

Graph of Risk Intensity and Asset Alignment

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Scale Made by John Kicklighter

As for the Cable, there are some fairly explicit technical levels to operate around. The upper threshold at 1.3200 may not shape a monthly chart but it is meaningful resistance. Alternatively, the 1.2850 figure is range support, trendline channel floor and the 100-day moving average. Everything considered, this is a fairly tight holding pattern that could break with the proper motivation. There are similar haven dynamics to consider here, but the relative aspects of stimulus, growth and the coronavirus policies (UK lockdown against US vagary) can direct views. However, with such an unclear backdrop for the Pound, a break that is more likely to be urged by the Greenback is likely to be curbed by the uncertainties shared by the pair.

USD/JPY MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 1% 3%
Weekly -2% -1% -2%
What does it mean for price action?
Get My Guide

Chart of GBPUSD with 100-Day Moving Average (Daily)

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Chart Created on Tradingview Platform

Finally, there is AUDUSD. This is a pair that has long stood as a carry pair – whereby the historically higher Aussie yield and the relatively more restrained US benchmark would provide a clear preference for risk appetite and risk aversion. That correlation has been seriously undermined with the collapse and yields and the RBA’s further suppression of its own currency’s carry potential. Risk on may still be an option for the Australian Dollar, but confidence that also has a USD bent could just as readily return us to 0.7000. A safety bid would very likely put that floor in appeal and further break it.

AUD/USD MIXED
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 1% -7% -5%
Weekly 0% 1% 0%
What does it mean for price action?
Get My Guide

Chart of AUDUSD with 100-Day Moving Average (Daily)

EURUSD, USDJPY, GBPUSD and AUDUSD Outlook: What's Ahead?

Chart Created on Tradingview Platform

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