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Risk Aversion Hits the FX Market: Trade it, or Fade it?

Risk Aversion Hits the FX Market: Trade it, or Fade it?

2018-05-29 18:50:00
James Stanley, Currency Strategist
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In this webinar, we looked at price action setups in equities and FX markets after risk aversion has started to show. With fireworks taking place in Italian politics, European political volatility has come back into full view of global markets; and European market volatility could be here for a while. EUR/USD has continued its downside slide, pulling back short of the 1.1500 level earlier today, and this keeps the door open for more pain in Euro markets such as the DAX. The rest of this week has a heavy USD-based calendar, with the Fed’s preferred inflation gauge of PCE released on Thursday, and Non-Farm Payrolls due for release on Friday morning.

Talking Points:

- If you’re looking to improve your trading approach, our Traits of Successful Traders research could help. This is based on research derived from actual results from real traders, and this is available to any trader completely free-of-charge.

- If you’re looking for a primer on the FX market, we can help. To get a ground-up explanation behind the Forex market, please click here to access our New to FX Trading Guide.

If you’d like to sign up for our webinars, we host an event on Tuesday and Thursday, each of which can be accessed from the below links:

Tuesday: Tuesday, 1PM ET

Thursday: Thursday 1PM ET

DAX Follow-Thru From Last Week’s Bearish Engulfing

We started off with European stocks by looking at the DAX, which has taken a hit since political pressure began to increase. Last week produced a bearish engulfing formation on the weekly chart of the DAX, helping to stop a two-month up-trend dead in its tracks. So far this week, we have bearish follow-thru, and this keeps the door open for additional down-side.

FTSE 100 With Bearish Pin Bar Last Week

Similarly, the FTSE 100 printed a bearish pin bar off of last week’s price action, and we also looked at this one in the equities forecast for this week. Yesterday was a holiday in the UK, and today the index played a bit of catch-up.

Dow Jones Downside Break

European weakness has started to seep into American markets, with US stocks on the offer this morning as political risk gets priced-in. We looked at a bearish setup in the Dow this morning, and that entry has filled-in. At this stage, two of the three targets have already been met, and this can keep the door open for short-side strategies down towards the psychological level of 24,000.

US Dollar Breaks Out (Again), Finds Resistance at 95.00

The topside surge in the Greenback has continued, and a significant contributor here has been the continued slide in the Euro. While EUR/USD tests ten-month lows, the US Dollar is testing seven month highs around 95.00. Substantiating a bearish case here could be difficult, but as we shared, there were two areas with the potential for ‘tactical’ short stances, primarily looking at bullish potential in markets like AUD/USD or NZD/USD.

EUR/USD – The Bears are In Control as European Political Risk Moves Back into the Spotlight

The driver of this downside move in the Euro is coming from uncertainty in European politics. With Italy in the midst of a rather contentious situation, and Spain heading for a no confidence vote for PM Mariano Rajoy on Friday, the fragility of the European Union is back in the spotlight. In 2012 when we were in the midst of a similar manner, ECB President Mario Draghi offered his ‘whatever it takes’ promise. More recently, Mr. Draghi has been rather quiet. But what might the ECB say, and when might they say it? Until then, we’re in a bit of a vacuum, as political risk remains in both Italy and Spain, and this can keep the offer heavy in the Euro.

GBP/USD

Cable looks similarly weak, albeit with less enthusiasm from the recent bearish push in the pair. We looked at bearish continuation scenarios in yesterday’s article, GBP/USD: Cable Collapse Stalls at Six-Month Lows, More Pain in Store?

USD/JPY Test of Higher-Low Support Doesn’t Look Positive

At this stage, USD/JPY is grasping on to the bottom of the support zone that we were following that runs from 108.62-109.19. With prices beginning to breach the under-side of that zone earlier this morning, it doesn’t look as though that support will hold for long. This is likely coming from the fact that the Yen is getting a bit of safe-haven preference to the US Dollar at the moment, and this can keep long-Yen as an attractive venue to continue the risk aversion scenario. However, with that being said, long-Yen will likely be a bit more attractive against vulnerable currencies – such as the Euro or the British Pound, as opposed to the US Dollar at its strongest levels in more than half a year.

USD/CHF Tonality Change

While the Dollar is strong elsewhere, USD/CHF is putting in some interesting price action, with the pair falling back-below the parity level and continuing to find offers. This can keep the door open for short-side setups in the pair, targeting a move back-towards 97.00.

EUR/JPY For Risk Aversion

We looked at this one last week and prices have really put in some bearish action. At this stage with the move so stretched, the one attractive way of moving forward could be the short-side breakout strategy, looking for down-side moves below the Fibonacci level at 124.90. Outside of that, managing risk can be a challenge because of how cleanly that move came-in, leaving prices far away from any nearby swing points that can be used for stop placement.

GBP/JPY for Risk Aversion

This is another risk aversion setup we looked at last week, and I looked at another short-side setup in the pair this morning. Earlier this morning, we caught a bounce off of the 14.4% Fibonacci extension of the February sell-off, and that led-in to a bounce back-up to 145.00. That helped to elicit another wave of continuation in the pair, and this keeps the door open for short-side continuation. Similar to what we looked at in EUR/JPY, the lack of nearby points of resistance make playing pullbacks unattractive. Short-side breakouts could be utilized to look at integrating continuation strategies in GBP/JPY.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 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

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

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