- Top headlines to end the week was the implementation of the US-China reciprocal ($34 bln) tariffs and June NFPs
- Despite the rubber hitting the road on trade wars, US equity indices buoyed sentiment – raising questions for sentiment
- Key event risk ahead are unscheduled updates on the trade war, the Fed’s report to Congress, BoC rate decision and Brexit news
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.
A Rebound In the S&P 500 and Dow Despite Trade War Action
Much of the trade war that has unfolded thus far has been threats or signal of intent for tariffs to be placed in the future (or triggered as retaliation upon the instigator’s move). What the headlines signaled this past week was the definitive implementation of a very high burden on trade between the United States and China – the two largest economies in the world. As of midnight Friday, the US started to enforce $34 billion in tariffs against a list of Chinese goods in response to perceived long-term intellectual property theft. Occurring concurrently, China would also execute its own import taxes on US goods at the same scale. The subsequent $16 billion in duties that would round out the initial $50 billion threat are due sometime in the coming two weeks. This is definitively a step towards curbing global growth and the circulation of capital; and yet, the benchmark ‘risk’ assets climbed through Friday’s end. The From a mixed view in the Asian and European sessions, the major US indices afforded a clear advance with the Dow winning a wedge break above 24,400 and the S&P 500 securing its best two-day rally in two months with a charge above 2,740.
The State of Risk and Influence of Trade Wars Ahead
If we were to simplistically extrapolate the market’s performance through the end of the week, some may draw the conclusion that trade wars have been priced in and now do not matter or that sentiment is simply so robust it can concur all (a power so many song attribute to ‘love’). Of course, that is an unreasonable assessment. Trade wars matter and they are progressing. Even if it doesn’t spur a move to protect capital before the economic pain hits, the impact to actual growth is inevitable and detrimental. This is like ignoring smoke before the fire engulfs us. Exactly what has the capacity to revive our sensitivity to trade wars moving forward is unclear, but it probably isn’t an ignorance that will be entertained for long. There are few scheduled events that can be directly tied to the next stage of the escalation. Threats or calls for reason between the United States and China are important events to watch for. However, for sheer global and sentiment impact, little will compare for risk to true progress in the auto tariff risks between the US and EU.
Dollar Has Multiple Temptations but No Conviction As Yet
While the US equity indices didn’t render the expected response to the trade wars, the Dollar finally took a dive this past week as the risk of a collective retaliation started to enter the collective conscious. The trade-weighted DXY Index (heavily skewed towards the EURUSD) cleared recent support and is closing in on the 50-day moving average. Where this favorite benchmark is already marking progress, an equally-weighted index has leveled up to support without actually making the requisite technical break. The June NFPs this past Friday did little to shift focus to the economy or monetary policy, but next week’s scheduled event risk can help urge the market’s focus elsewhere. The consumer inflation data (CPI) and Fed’s monetary policy report to Congress will put rate speculation to the test – for better or worse – while the University of Michigan consumer sentiment and NFIB small business sentiment surveys will gauge confidence amid policy changes.
Pound Will Double Down on Brexit, Loonie Counting Down to the BoC
Both the Pound and Canadian dollar were loaded for high level event risk to close out this past week. There was some significant development on both fundamental fronts, but rather little actual market movement. It may be reserving its response for the week ahead. While GBPUSD advanced on news that UK Prime Minister Theresa May won support for her ‘soft Brexit’ approach to the customs union internally, the real test is whether the EU is warm to their position. Brexit will remain top of mind for the Sterling; and until we have a clear view of its path, don’t expect unfettered trends for GBPUSD, EURGBP and other GBP crosses. As for the Canadian dollar, the blend of employment and trade statistics offered a general improvement on the former and clear decline for the latter. Nevertheless, the Loonie made a limited move through Friday’s close. The Bank of Canada (BoC) rate decision this coming Wednesday may offer a less complicated cue for the currency to follow. With USDCAD angling for a reversal, it is natural to find more speculative interest here, but AUDCAD and NZDCAD carry less contradictory baggage. We discuss all of this and more in this weekend Trading Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists
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.
USD/JPY Rate Risks Fresh Monthly Highs as Overbought Signal Persists
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.
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
- 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
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Additional Trading Resources
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— Written by David Song, Currency Analyst
Follow me on Twitter at @DavidJSong.
EUR/CAD Chart Triangulating, Downside Break Favored
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)
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EUR/CAD 4-hr Chart
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
British Pound May Rebound on UK Inflation Uptick
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
EUROPEAN TRADING SESSION
** 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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