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Count Down to Trade War Engagement, Dollar Interst in NFPs, Oil Turning

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Talking Points:

  • Despite the return of American liquidity following the mid-week holiday, volumes held low and the Dow dove deeper into range
  • Trade wars continue to command the headlines with the US-China tariffs due to go into effect at Friday midnight
  • Though Euro and Pound are dealing with key themes, resolution is difficult to muster compared to USDCAD on jobs, trade data

What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 3Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

What is Driving the Risk Trends?

It is a simple yet complicated question at the same time: what is driving risk trends? Theoretically, the markets are in a better position to mount a significant move should fear or conviction finally take the market. US traders are back online after the liquidity drain for the mid-week Independence Day market holiday. Well, it is at least open for trade. Turnover Thursday in the US and other global markets showed little enthusiasm to simply jump back into the market with full conviction. That lack of conviction should come as little surprise given the circumstances. The fundamental backdrop is overloaded with both scheduled event risk and even greater open-ended threats. There are positives the market could pick up on if so inclined. Another company has announced a hefty share buyback scheme (Glencore to the tune of $1 billion) and there are reports the EU may give some ground to cool US President Trump’s troubling drive towards auto import taxes. Yet, the risks are simply far more onerous and numerous. With the US-Chinese tariffs due to go into effect, the EU separately agreeing to place metals tariffs on the US and enough data to further economic forecasts; market participants should see reason for caution.

Count Down to Trade War Engagement, Dollar Interst in NFPs, Oil Turning

The Dollar is Starting to Grow Heavy

Should the Greenback continue to rise because it has the most hawkish monetary policy bearing of all the majors or perhaps because it is the traditionally preferred safe haven in the FX ranks? Or, perhaps the benchmark currency represents one of the most at-risk baseline currencies owing to its central role in the escalation of global trade wars? There is no agreement on this view, but there is plenty of speculation supporting both positions. Just weeks ago, the rate advantage and textbook haven role was a unique contradiction that nevertheless offered the Dollar consistent buoyancy. Nowadays, the prominence of retaliatory trade efforts by world powers and the loose threats of a collaborative response against the United States are familiar enough that the more complicated but systemic view is starting to break into the mainstream headlines. With the US duties versus China finally due to go into effect and the further escalations with both its largest single counterpart (China) and aggregate trade partner (the EU) still lingering in the air, there is unresolved risk for traders to remain concerned over. Yet, we will also have a targeted fundamental impact in the form of scheduled event risk: June NFPs and the May trade balance. With a clear outcome, if these indicators signal a dovish turn for monetary policy and economic pinch from trade wars; it could hasten a Dollar reversal.

Count Down to Trade War Engagement, Dollar Interst in NFPs, Oil Turning

Euro, Pound and Loonie for Escalating Event Risk

The Dollar isn’t the only currency that will face significant event risk over the final 24 hours of the trading week. The Euro will carry the most abstract event risk versus key data. There is very little in the way of consequential event risk on the shared currency’s calendar, but the themes are loaded. This past session, the IMF downgraded Germany’s economic outlook for 2018 owing to rising protectionism and the influence of Brexit while the EU members voted to approve a tariff on US metals to retaliate against the US. Trade wars will be on the mind after the US and China implement their taxes and reports that the EU may compromise on autos offers to head off a crisis. The Pound’s milestones are more timely but no less systemic: following reports that the Brexit Minister David Davis is leading pressure against UK Prime Minister May who is warming to a soft Brexit, the full UK cabinet is due to discuss its customs position Friday. By far, the most targeted event risk will come from the Canadian dollar. With a run of jobs and trade data hitting at the same time as the US equivalent, USDCAD will be an exceptionally loaded pair Friday.

Count Down to Trade War Engagement, Dollar Interst in NFPs, Oil Turning

Oil and Gold Look to be Staging Reversals

Where USDCNH and GBPUSD are attempting to sustain trends while the Dow and EURUSD are looking for break from congestion, key commodities are posing a different technical path: reversals. With the Dollar starting to slip, its alternative-currency foil gold has started down the path of a possible medium-term bear trends from $1,240 with a three-day advance. If risk aversion is to coincide with a retreat from the Greenback – increasingly probably with the premium afforded to the Fed and the United States’ central role in trade wars – this commodity is arguably in the best position to benefit. Crude oil is another commodity looking to round into a turn – however this one is coming off a multi-week bull trend. The past weeks’ worth of trade has shaped consolidation at the top of an extended channel and Thursday’s performance was the first clear retreat. Headlines have run from a jump in US inventories (1.25 million barrels) to US President Trump demanding OPEC increase output to Iran’s Oil Minister saying $100/barrel oil is inevitable due to the US president. Will this commodity finally follow traditional fundamentals? And if so, will the picture be clear enough to make way for a trend? We discuss all of this and more in today’s Trading Video.

Count Down to Trade War Engagement, Dollar Interst in NFPs, Oil Turning

If you want to download my Manic-Crisis calendar, you can find the updated file here.



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Forex

USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists

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Japanese Yen Talking Points

USD/JPY remains overbought as Federal Reserve Chairman Jerome Powell strikes a hawkish outlook in front of U.S. lawmakers, and recent price action keeps the topside targets on the radar as the exchange rate initiates a fresh series of higher highs & lows.

Image of daily change for major currencies

USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists

Image of daily change for USDJPY

USD/JPY bounces back from the session-low (112.71) even as U.S. Housing Starts contract 12.3% in June, with Building Permits narrowing 2.2% during the same period, and the dollar-yen exchange rate may continue to appreciate over the remainder of the week as the Federal Reserve appears to be on track to further normalize monetary policy in 2018.

The testimony from Governor Powell suggests the Federal Open Market Committee (FOMC) will continue to embark on its hiking-cycle over the coming months as ‘incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year.’ In turn, Fed officials may show a greater willingness to implement four rate-hikes this year as the committee ‘believes that–for now–the best way forward is to keep gradually raising the federal funds rate, and the FOMC may continue to prepare U.S. households and businesses for higher borrowing-costs despite the growing threat of a trade war with China.

Image of Fed Fund Futures

Keep in mind, Fed Fund Futures now highlight a greater than 60% probability for a December rate-hike, and expectations for higher interest rates may continue to prop up USD/JPY especially as the Bank of Japan (BoJ) sticks to its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

With that said, USD/JPY may continue to exhibit a bullish behavior as the exchange rate initiates a bullish sequence and pushes to a fresh monthly-high (113.14), and the topside targets will stay on the radar as long as the Relative Strength Index (RSI) sits in overbought territory.

USD/JPY Daily Chart

Image of USDJPY daily chart

  • Broader outlook for USD/JPY remains constructive as both price and the RSI preserve the bullish trends from earlier this year, with the pair at risk of extending the advance from earlier this week as it carves a string of higher highs & lows.
  • Another close above the 112.40 (61.8% retracement) to 112.80 (38.2% expansion) region opens up the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
  • Will keep a close eye on the RSI as it trades in overbought territory, with a move below 70 raising the risk for a pullback in the exchange rate as the bullish momentum wanes.

For more in-depth analysis, check out the Q3 Forecast for the Japanese Yen

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

Image of DailyFX economic calendar

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2018.

— Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



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EUR/CAD Chart Triangulating, Downside Break Favored

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Check out the DailyFX Q3 Euro Forecast forecast for our intermediate-term fundamental and technical perspective.

EUR/CAD is a cross-rate we’ve been watching recently given its technical positioning on the daily/weekly chart and its price action on the 4-hr chart. The top and drop in late-June put price back below a slope rising up from February 2017 in addition to the bottom of a shorter-term channel since the end of May.

Since declining below these thresholds we’ve seen a weak response. Looking at the 4-hr chart, we initially viewed the price sequence over the past month+ as an upward leaning head-and-shoulders pattern, but more recently with a contraction in price action we are seeing a triangle form. It could make for a complex right shoulder, but focus is now centered on the developing wedge. (Either way, whether one considers it a bearish wedge break or H&S breakdown, bias is the same…)

Given the context of the aforementioned daily slope/channel as well as the chart leaning lower off the March high, a downside break of the wedge is preferred. An undercut will initially have a swing-low from mid-June in focus in the vicinity of 15150/115, followed by a line running over January right around 15000 (yes, this t-line could be the neckline of a broader head-and-shoulders pattern). Beneath there lies the low near 14900 from the end of May.

EUR/CAD Daily Chart (Slope in play)

EUR/CAD Chart Triangulating, Downside Break Favored

Check out these 4 core tenets for Building Confidence in Trading.

EUR/CAD 4-hr Chart

EUR/CAD 4-hr chart, wedge forming...

We’ll take it one step at a time. A break below the bottom of the pattern on the 4-hr will have the trade in motion, with a stop placed back inside the pattern. Targeting 15150/115, 15000/4917. We’ll play it by ear as targets near – if momentum is strong, then looking to extend the trade, if momentum stalls then look to start peeling off the position.

On the flip-side, in the event of a breakout to the top-side and recapture of the aforementioned slope, traders may want to play the wedge breakout from the long-side – but given it will be uphill, on this end it is likely a trade which will be avoided.

***Updates will be provided on this idea and others in the trading/technical outlook webinars held on Wednesday and Friday. If you are looking for ideas and feedback on how to improve your overall approach to trading, join me on Thursday’s for the Becoming a Better Trader webinar series.

For another recently expressed bearish bias on this cross, check out Tyler Yell’s take on EUR/CAD.

Resources for Forex & CFD Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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British Pound May Rebound on UK Inflation Uptick

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TALKING POINTS – UK CPI, BRITISH POUND, POWELL, BEIGE BOOK, US DOLLAR

  • First UK CPI gain in seven months might boost British Pound
  • US Dollar may extend gains on Powell testimony, Beige Book
  • Lull in top-tier event risk makes for quiet Asia Pacific trade

A lull in high-profile event risk translated into quiet consolidation across the G10 FX space in Asia Pacific trade. Volatility might make a comeback in European market hours however as UK CPI data comes across the wires. The headline on-year inflation rate is expected to rise to 2.6 percent, marking the first increase in seven months.

The British Pound suffered heavy losses yesterday ahead of a House of Commons vote on an amendment that would force the UK into the EU customs union if no new post-Brexit trade agreement were reached. Prime Minister Theresa May opposed the move and speculation that it might pass anyway stoked worries about an imminent leadership challenge.

The government prevailed by a razor-thin majority, de-escalating the situation at least somewhat. That coupled with a strong CPI print that reminds investors of an incoming BOE interest rate hike might offer Sterling a lifeline. The priced-in policy path reflected in OIS rates puts the probability of tightening at Augusts’ meeting of the rate-setting MPC committee at a healthy 77.6 percent.

Later in the day, another day of testimony from Fed Chair Powell is in focus. This time, he will appear in the House of Representatives having spoken before a Senate Committee yesterday. A hawkish lean in those comments drove the US Dollar higher yesterday, as expected. More of the same coupled with an upbeat Fed Beige Book survey might keep the greenback on the offensive.

See our free guide to learn how to use economic news in your trading strategy!

ASIA PACIFIC TRADING SESSION

British Pound May Rebound on UK Inflation Uptick

EUROPEAN TRADING SESSION

European Trading Session Economic Calendar

** All times listed in GMT. See the full economic calendar here.

FX TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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