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Dollar and S&P 500 Stable Despite Trade Wars, Pound Up-Ended by Political Risk

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Talking Points:

  • Despite the US and China exchanging $34 billion in tariffs just last week, risk assets like the S&P 500 charged higher Monday
  • Any confidence in the Brexit proceedings earned last week fell apart as Davis, Johnson and Baker resigned from May’s Cabinet
  • ECB members raised numerous warnings, the Loonie’s attention is being pulled forward to BoC, oil and gold defy fundamentals

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.

Do Trade Wars Truly Not Matter?

We weighed in on how serious the markets would treat trade wars last week when US, Chinese and risk-oriented markets seemed to defy the news that the United States and China had triggered $34 billion in import tariffs against each other last week. Where the markets were moderately green Friday, they seemed to charge forward to start off this new week. The benchmark US indices (S&P 500, Dow, Nasdaq) all gapped higher on the open while European and Asian shares registered advances of various intensity. Most remarkable in this asset class though was the Shanghai Composite’s strongest single-day rally in over two years. And, just to ensure this was a defiance of general sentiment and not a unique attribute to equities; the same advance was found in emerging markets, junk bonds, yen crosses and risk-tinged commodities. So, again, we should evaluate for ourselves: do trade wars truly matter to investors and capital markets? In my opinion, absolutely. In previous years, decades and cycles; the markets have defaulted to complacency and moral hazard when confronted with difficult forecasts. Given how complex and absolutely comprehensive this to the norms that have been established this past decade, it should come as little surprise that those heavily invested would delay or hold out hope. It doesn’t change the fact that the economic and financial impact will ultimately be felt.

Temporary Confidence, Long-Term Realities

As the saying has been adapted: “the markets can remain irrational longer than you remain solvent”. After years of moral hazard, FOMO, yield chase, monetary policy dependency, etc; it is certainly within the market’s capacity to keep its speculative balance. However, it is exceptionally risky to assume we can continue to produce meaningful gains given the overt economic and financial clouds we face. Assets are already exceptionally expensive and the risks too material to presume that there is acceptable risk-reward left in chasing a buy-and-hold strategy. However, that doesn’t mean that we can’t take advantage of temporary lapses in logic. The Dollar is a good example of this short-term / long-term disparity. Ultimately, a deepening of the global trade war will find the US increasingly the focus of trade counterparts’ anger as it furthers the burden on their economies through trade. Yet, if the markets are willing to overlook the immediately risk implications, they certainly would be willing to ignore the ‘deeper cut’ threats to the Greenback’s reserve status. I wouldn’t want to seek out any lasting long-Dollar trades or set targets far off on the horizon, but range based moves for the likes of EUR/USD or USD/CAD with cross currency allowances are viable. That said, if the markets want to evaluate the situation more pessimistically (objectively), a Dollar tumble is better served through the likes of USDJPY or USDCHF. Consider the same factors when evaluating ‘risk’.

USD Currency Index Chart

Dollar and S&P 500 Stable Despite Trade Wars, Pound Up-Ended by Political Risk

Goodbye Brexit Progress

Through the end of last week, it seemed that the UK’s divorce from the EU (Brexit) was on more stable ground. While the situation was still remarkably complex and the ultimate negotiations between the UK and EU were still on uneven ground, it seemed that at least Prime Minister Theresa May had a more solid mandate with which to approach the table. She had received a short-term bye from Parliament with the ‘no deal’ fears and her Cabinet Friday seemed to give support her ‘soft Brexit’ approach to the customs relationship. All the incremental optimism collapsed however to start this week. The rebels in her government apparently did not support the less aggressive separation terms she was proposing and a string of ministers announced their resignation Sunday into Monday: David David (Brexit Minister); Boris Johnson (Foreign Minister) Steve Baker. This now throws the stability of the UK government into question which obviously makes the path towards a ‘clean’ and prosperous compromise in this divorce that much more problematic. The Sterling has been anchored due to Brexit uncertainties for the past month-and-a-half. This development threatens to be outright bearish. And, that goes for the UK assets like the FTSE 100 – which seemed to rise with the Pound’s retreat – as well.

GBP Index Chart

Dollar and S&P 500 Stable Despite Trade Wars, Pound Up-Ended by Political Risk

Euro, Canadian Dollar, Gold and Oil – Trade War Tail Risk

It is easy to get wrapped up in the markets that are at direct risk from the active front of the trade war. However, this is not just a US-China engagement. This is a global risk whether the threat spills over from these two countries’ direct relationship or certainly if the gravity of the situation starts to draw in more countries through targeted actions. From the Euro this past session, we heard the concern from the ECB. President Mario Draghi reiterated his warning that trade wars represented the greatest threat to growth and stability moving forward. It was Coeure’s statement that fears of trade wars wouldn’t stop the ECB normalizing and Nowotny’s warning that trade wars can lead to currency wars made more detailed and certain risks of the global fallout. From the Canadian Dollar, we immediate technical appeal has to be considered against the anticipation of Wednesday’s BoC rate decision. The speculation over monetary policy tightening must be weighed against the realities of growth risks in the aggressiveness of the central bank. Then there are the commodities. Gold’s wobble in its tentative recovery obscures its appeal amid trade wars, risk stability concerns, Brexit issues and recognition that monetary policy has reached the end of its effectiveness but normalization is a fraught effort. The contrast is crude oil. Its consolidation at multi-year highs capped by trend channel resistance looks ripe for a fundamental catalyst. And yet, it has repeatedly defied traditional fundamentals. So perhaps it is one of the purely technical oriented markets of our times. We discuss all of this and more in today’s Trading Video.

Light Crude Oil Futures Daily Chart

Dollar and S&P 500 Stable Despite Trade Wars, Pound Up-Ended by Political Risk

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

— Written by John Kicklighter, Chief Currency Strategist



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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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Forex

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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