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US Dollar Primed for Weakness - When Will it Break? USD/CAD, GBP/USD

Price action and Macro.

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US Dollar, USD/CAD, GBP/USD Talking Points:

  • The US Dollar has had a busy day being driven by a couple of different themes.
  • The net result of this morning’s events has been a pretty clear indication that President Trump wants a weaker US Dollar as the Fed has continued to attempt to strike a tone of stability.
  • DailyFX Forecasts are published on a variety of markets such as Gold, 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.

The US Dollar has held resistance through this morning’s events, which included an unexpected surprise in the ongoing trade rift between the US and China. This announcement of surprise tariffs from China on US exports came in just hours ahead of FOMC Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium and helped to provide a yo-yo effect to US stocks as an initial move lower on the tariff announcement was quickly offset by a more-dovish-sounding Jerome Powell.

As noted by our own Chris Vecchio earlier this morning, the key statement from Chair Powell appears to be ‘we will act as appropriate to sustain the expansion,’ which points to the fact that the bank is actively watching to see whether the on-off theme of risk aversion comes back, at which point they’ll respond with softer policy.

Chair Powell noted the rising global risks and the ‘deteriorating’ outlook for global growth, both items looked at as dovish factors around the Federal Reserve. Powell did successfully side-step the topic of near-term rate moves while still alluding to the potential for a responsive Central Bank in the face of rising risks, and this has led to a directional move-lower in the US Dollar.

The Greenback came into the day holding on to a resistance zone taken from around April and May highs. This zone was breached briefly in early-August on the heels of the ‘rate cut rally’ in the USD, but since, has come back into play to help hold a series of lower-highs in the currency.

US Dollar Daily Price Chart

usd price chart

Chart prepared by James Stanley; US Dollar on Tradingview

As looked at yesterday, the longer-term backdrop in the US Dollar is one that appears set for a fall. The currency has traded into a rising wedge formation over the past four months as buyers have remained very responsive near support while getting increasingly less aggressive near new highs or resistance. Such patterns will often point to bearish reversal potential but, given the backdrop, timing that theme can remain incredibly difficult and will likely require a more-concerted dovish flip at the Fed.

The big question for right now is whether this morning’s tightening in tensions on the trade war front and the accompanying dovish response out of the Fed, which remained non-committal, will be enough for sellers to make their push?

US Dollar Weekly Price Chart

us dollar weekly price chart

Chart prepared by James Stanley; US Dollar on Tradingview

When Will the US Dollar Break?

Given this morning’s events, the answer to that question has gotten a little more difficult to answer as there’s now a new variable in the equation. Previously, the potential for a September-October breakdown looked probable. The Fed was likely going to try to remain stable and consistent, looking to avoid ringing alarm bells with a 50 basis point cut.

But – with the trade war amping up yet again, stress could continue in the near-term until the Fed does begin to show a bit more concern. Case in point – the US Dollar is now trading at a fresh weekly low and that scenario could continue well-ahead of the next FOMC rate decision less than a month away.

US Dollar Four-Hour Price Chart

us dollar four hour price chart

Chart prepared by James Stanley; US Dollar on Tradingview

US Dollar Weakness Strategies

So, at this point it should be pretty clear that the President of the United States wants a weaker US Dollar. And while POTUS may have a minimal impact on monetary policy, he does have the reins of fiscal policy, which could arguably be even more impactful long-term. The Fed seems to be hesitant to just give in to the demands for softer policy yet as employment has remained strong and inflation near the bank’s 2% target. And at this point, while markets are amped up for more softening out of the Fed later this year, the bank simply hasn’t acknowledged that directly, instead hinting that they could post cuts if needed by not appearing yet ready to commit.

This begs the question of positioning around themes of USD-weakness, and as looked at over the past couple of months, Gold will likely remain as one of the more attractive venues for such themes. Given this morning’s continued bullish breakout, that theme remains intact.

But outside of Gold, there may be a few areas of focus for currency traders, specifically looking at the Canadian Dollar and the British Pound.

USD/CAD Ready to Reverse?

The month of June provides a template here as that outlay saw both a strong Canadian Dollar to go along with a weak US Dollar as the Fed was talking up softer policy. This led to a precipitous decline below a trend-line that had held the lows for much of the prior year. That bearish theme took a break for about a month, from mid-July into mid-August as both of those drivers saw a bit of respite. June inflation numbers came in soft out of Canada and the Federal Reserve tried to walk a line of stability on the monetary policy front.

But – Wednesday brought another surprisingly strong Canadian inflation print and that goes along with this recent addition of USD-weakness. USD/CAD may soon be ready to get back to its bearish ways. The pair has already shown tendencies of topping by holding inside of resistance over the past two weeks. But, at this stage, bulls haven’t yet given up, and a breach of the bullish trend-line can re-open the door for short-side strategies in the pair.

USD/CAD Daily Price Chart

usdcad daily price chart

Chart prepared by James Stanley; USDCAD on Tradingview

GBP/USD

I’ll be the first to admit that given the fundamental backdrop here, bullish setups in Cable can be a bit difficult to justify. The UK is heading head-first into Brexit and we still have no clue how the divorce will take place, or even if it will take place at all. What we do know, however, is that the pair has struggled to continue its descent since a long-term trend-line came into play earlier this month. Below, on the monthly GBP/USD chart, emphasis is paid to a trendline connecting the 1985 pre-Plaza Accord lows with the flash crash from 2016. So far, this has helped to hold the pair after a dizzying sell-off continued from April and into August.

GBP/USD Monthly Price Chart

gbpusd monthly price chart

Chart prepared by James Stanley; GBPUSD on Tradingview

The allure around potential topside in GBP/USD at the moment is two-fold, based largely on the technical backdrop and a bit of contrarianism. With Boris Johnson taking a rather rigid stance into discussions, where he refuses to take the option of No-Deal Brexit off-the-table, he’s shown that he’s been able to get a bit of cooperation from the European side on the Irish backstop. And in the British currency itself, that four-month-trend of pain saw the pair move into deep oversold levels that have yet to fully abate; meaning there could be a considerable number of short positions still left to cover, particularly should USD-weakness take over as a dominant theme in the coming weeks.

GBP/USD Four-Hour Price Chart

gbpusd four hour price chart

Chart prepared by James Stanley; GBPUSD on Tradingview

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or 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




Euro May Fall vs US Dollar on Powell Comments at Jackson Hole

Political economy, economic and market themes.

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US Dollar, Euro, Jerome Powell, Jackson Hole – TALKING POINTS

  • EURUSD may fall if Powell comments stoke risk aversion
  • Subsequent demand for liquidity may push EURUSD lower
  • USD may also rise if Fed pours cold water on rate cut bets

Learn how to use political-risk analysis in your trading strategy!

The economic agenda brings little to the table on Friday, leaving traders focused on the Jackson Hole symposium. Market participants will be especially keen to tune in when Fed Chairman Jerome Powell speaks at the conference at around 14:00 GMT. His comments on the growth outlook may stoke risk aversion and lead to a US Dollar rally that may also be buttressed by hints that the Fed is not as dovish as markets think.

At the most recent FOMC meeting, Mr. Powell stated that the rate cut was not the start of an easing cycle but more of an effort to maintain the economic expansion. Despite markets receiving a 25-basis point cut, equities fell because the nature of the comments were comparatively less-dovish than what they were expecting. We may see a similar reaction tomorrow where US Dollar strength will preview at the expense of equities.

Having said that, fundamental headwinds could make it more difficult to remain neutral. Weakening growth prospects out of the Eurozone and China is undermining demand for US exports against the backdrop of the ongoing US-Sino trade war. Markets are also still having to contend with the fear that a cross-Atlantic trade war between the EU and US could still happen and further dampen inflationary pressure.

Furthermore, the roughly $17 trillion market for negative-yielding bonds – meaning lenders pay the coupon rate to the borrower vs the other way around – suggests markets are bracing for what could be a dreary road ahead. This is compounded by concerns that hidden weaknesses in the financial system – like unstable collateralized loan obligations – could exacerbate a downturn and further pressure global growth prospects.

CHART OF THE DAY: Japan, German 10-Year Bond Yields Sink Deeper into Negative Territory

Chart showing German bunds, Japan 10-year bond yields

German Bund chart created using TradingView

FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter




GBP Gains. Yen Rallies as US Manufacturing Shrinks Most Since 2009

Classic technical analysis, macro and economic themes.

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Asia Pacific Market Open Talking Points

  • GBP/USD eyes resistance as Merkel cools no-deal Brexit worries
  • S&P 500 wobbles, manufacturing contracts first time since 2009
  • Markets may consolidate before highly-anticipated Powell speech

Find out what the #1 mistake that traders make is and how you can fix it!

The British Pound rose against its major peers over the past 24 hours on the latest Brexit developments. According to reports from The Hague, German Chancellor Angela Merkel noted that they could work on finding a "regime" that keeps the Good Friday Agreement…while also finding a backstop solution by the end of October. This helped to cool fears of a “no-deal” Brexit after the UK economy contracted in Q2.

Meanwhile, the anti-risk Japanese Yen outperformed as Wall Street went for a roller coaster ride on Thursday. After an upside gap, the S&P 500 fell as much as 0.9 percent before trimming losses and ending little changed. The deterioration in sentiment weighed against the pro-risk Australian and New Zealand Dollars while the haven-linked US Dollar aimed cautiously higher.

Dismal US economic data and less-dovish Fed commentary drove markets towards the latter half of Thursday. US Manufacturing PMI (49.9) contracted for the first time since September 2009, following the trend of a global slowdown in factory output amid trade wars. Philadelphia Fed President Patrick Harker then spoke and said he “reluctantly” supported July’s cut, adding that they should stay where they are for now.

Friday’s Asia Pacific Trading Session

A lack of prominent event risk during Friday’s Asia Pacific trading session places the focus for currencies on sentiment. Regional bourses may consolidate ahead of the second day of the Fed’s Annual Economic Policy Symposium in Jackson Hole. All eyes are on commentary from Chair Jerome Powell where markets at risk to overestimating the central bank’s dovish tilt.

British Pound Technical Analysis

Focusing on the British Pound and its recent performance, GBP/USDsurged higher out of a quiet consolidative range since the end of July. This followed fading downside momentum, as indicated by positive RSI divergence. But, Pound Sterling has more room to go before overturning the dominant downtrend. That is defined by the descending channel of resistance from May – red parallel lines on the chart below.

GBP/USD Daily Chart

GBP Gains. Yen Rallies as US Manufacturing Shrinks Most Since 2009

Chart Created in TradingView

FX Trading Resources

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter




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