US DOLLAR PRICE ACTION EYES EUR/USD & USD/CNH AMID TRADE WARS
- The US Dollar caught bid in response to widespread risk aversion driven by uninspiring trade war headlines
- USD price action stands to be dominated by the ongoing themes of trade war risk and monetary policy uncertainty
- Download our free 4Q-2019 Forecasts & Trading Guidesfor comprehensive fundamental and technical insight on the US Dollar
I noted this past Friday in my most recent US Dollar price volatility report that the US Dollar was set to oscillate around trade war developments and high-impact event risk front and center this week. So far, forex traders have weathered a series of headlines regarding the US-China trade war ahead of high-level negotiations between the two nations scheduled to resume on Thursday. Reports crossed the wires over the weekend that Chinese officials will seek to narrow the scope of trade talks amid increasing reluctance by Beijing to ink a comprehensive deal pursued by the Trump administration.
Specifically, the Chinese Commerce Ministry stated that changes to Beijing’s laws to protect intellectual property – a major sticking point of trade talks that Washington seeks to reform – “is not on the table and never will be.” China state-owned tabloid Global Times also reported that “if the US insists on a broad trade deal that contains too many core-interest related issues and forces China to make concessions, Washington will see nothing in the end.”
US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (APRIL 12, 2019 TO OCTOBER 07, 2019)
Once again signs are starting to emerge that US-China trade relations may soon deteriorate. This may encourage the Federal Reserve to continue providing monetary policy accommodation in the form of interest rate cuts, which will remain a lurking headwind for US Dollar bulls. Although, risk aversion seems to be the immediate reaction among market participants to the latest trade war headlines and has broadly bolstered the US Dollar – a favorite safe-haven currency.
From a technical standpoint, the US Dollar index was able to find support around its 20-day simple moving average and 23.6% Fibonacci retracement of the greenback’s bullish stretch since late June – key technical levels I have highlighted regularly in my daily US Dollar price volatility reports. This area of confluence near the 99.00 handle will look to keep the US Dollar afloat going forward. Below this support zone, the 50-DMA and 38.% Fib come into focus.
US DOLLAR IMPLIED VOLATILITY & TRADING RANGES (OVERNIGHT)
Looking to fundamental catalysts with potential to spark US Dollar currency volatility aside from the US-China trade war, there are several high-impact economic data releases and events listed on the DailyFX Economic Calendar that could sway USD price action. A speech from Fed Chair Powell on deck for 17:50 GMT will likely serve as the major dollar-centric source of volatility scheduled for Tuesday’s trading session, but the NFIB small business optimism survey slated for release earlier at 10:00 GMT could also warrant a reaction.
EUR/USD remains in the spotlight as tariff retaliation to the WTO Airbus ruling still looms while German industrial production and factory orders data could also weigh on the most liquid currency pair. Judging by the relatively tame EUR/USD implied volatility reading, forex options traders could be underpricing the risk that recent tariffs levied by Trump could escalate into a full-blown trade war between the US and EU.
USD/CNH implied volatility is jumping higher in light of heightened uncertainty surrounding upcoming trade talks. The latest USD/CNH overnight implied volatility reading of 6.8% ranking in the top 90th percentile of measures taken over the last 12-months. Keeping close tabs on spot USD/CNH this week is imperative considering the Chinese Yuan can serve as US-China trade war barometer, which can be used to broadly gauge market risk appetite. In turn, USD/CNH price action can be extrapolated to determine FOMC rate cut expectations and thus where the US Dollar might head next.
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Short-Term Rally May Run Into Resistance
EUR/USD Price, Chart and Outlook
- EUR/USD rallies off the 50-day moving average.
- Any Brexit-boost may see the pair test near-term resistance.
EUR/USD: 50-Day Moving Average – Resistance Turning to Support
The daily EUR/USD chart is showing a few conflicting signals of late, leaving a decisive break unlikely in the near-term. While the rally off the October 1 multi-month low at 1.0879 looks well supported, the pair are starting to run into resistance which should stem further upside. The pair however are benefitting from one technical indicator which may well limit any notable downside.
EUR/USD made a confirmed break above the 50-day moving average (blue line on chart) at the start of this week, for the first time since mid-July. The 50-dma has capped the pair for most of the year, while the 200-dma has acted as even firmer resistance aside from a breakout between June 21 and July 1. The 50-dma now turns to support for EUR/USD, while the 200-dma is the next important upside target.
The recent rally has broken a series of lower highs, confirming the shift in momentum, and a close above the 1.1250 lower high made on August 6 would change the medium-term outlook for the Euro to positive. A cautionary signal from the CCI indicator which shows that EUR/USD is currently heavily overbought.
Looking ahead the economic calendar has some important data releases next week including Eurozone consumer confidence, German and Eurozone PMIs and German IFO numbers. Of more importance will be the latest ECB monetary policy meeting and press conference on Thursday – President Mario Draghi’s last meeting – and the EU Commission Economic Forecasts on Friday, both notable market moving events. Resistance and support levels may come under pressure from any of the events noted above.
EURUSD Daily Price Chart (January – October 18, 2019)
IG Client Sentiment shows that traders are 51% net-short EURUSD, a bullish contrarian bias.
However recent daily and weekly positional changes give us a mixed outlook for EUR/USD.
What is your view on the Euro and the US Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at firstname.lastname@example.org via Twitter @nickcawley1.
EUR/GBP May Rise if Brexit Hopes Continue to Fade
British Pound Outlook, Brexit, GBP/USD Technical Analysis – Talking Points
- British Pound may reverse recent gains if Brexit perils undermine confidence
- UK members of Parliament will be voting on Boris Johnson’s new Brexit plan
- Will DUP derail Johnson’s plan, and if so, will there be yet another extension?
Learn how to use political-risk analysis in your trading strategy!
The Euro may edge higher against the British Pound if hopes for an orderly Brexit continue to dissolve. On October 17, UK Prime Minister Boris Johnson and European Commission President Jean-Claude Junker jointly announced that a Brexit deal had been reached. Sterling rallied on the news, though its upside movement was curtailed by news that the Irish Democratic Unionist Party (DUP) would not support his plan.
Securing their support is essential if Mr. Johnson wants to pass a deal through the House of Commons. If he fails to do so, it could severely derail plans for an orderly Brexit which would likely see the British Pound reverse a significant portion of its recent gains. However, EU Council President Donald Tusk has not ruled out the possibility of an extension if lawmakers failed to agree on a deal on Saturday.
In Parliament there are currently 287 voting conservative lawmakers which Mr. Johnson will need if his proposal is to survive. He may also have to lean on over 20 former Tory MEPs who switched over to become independents. However, that may not be enough votes which may compel the PM to ask for help across the political aisle.
Market Analysis of the Day: Will the British Pound Reverse its Recent Gains?
GBP Index 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
Australian Dollar Firm After China GDP Miss But Trend Aims Lower
CHINA, GDP, TRADE WAR, AUSTRALIAN DOLLAR – TALKING POINTS:
- 3Q Chinese GDP registers narrowly worse than expected at 6.0% y/y
- Industrial production data, US trade talks may have offset the headline
- Australian Dollar little-changed but overall trend still pointing lower
Where will markets end 2019? See our Q4 forecasts for currencies, commodities and stock indexes!
The Australian Dollar found little of interest in mildly disappointing Chinese GDP data. The figures put the on-year growth rate at 6 percent, a hair lower than the 6.1 percent expected by economists. Nevertheless, this marks the slowest pace of expansion in at least 27 years.
Upbeat industrial production readings might have helped offset a soggy headline figure. The rate of on-year growth unexpectedly jumped to a three-month high of 5.8 percent. Early signs of stabilization in retail sales figures may have helped as well.
The report’s limited implications for larger macro themes dominating investors’ attention may likewise explain the tepid response. Extrapolating a view on future Chinese growth seems nearly impossible without greater clarity on trade negotiations with the US, making today’s release appear somewhat moot.
Assessing the broader landscape, choppy AUD/USD consolidation since early August leaves firmly intact a well-defined downtrend established from late December 2018. Prevailing monetary policy trends suggest it is likely to continue, with longer-term charts setting the stage for deep losses in the months ahead.
Daily AUD/USD chart created with TradingView
AUD/USD 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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