US Session Developments – Stocks Recover, JPY Falls. Powell Speaks
Anti-risk currencies like the Japanese Yen and Swiss Franc underperformed on Thursday amidst a broad recovery in stocks around the world. Just a day ago, the opposite was true as the US pushed ahead with listing an additional $200b in Chinese import tariffs due to retaliation from the latter nation. Those fears died down today as China alluded to restarting stalled negotiations rather than pressing for quantitative measures.
BACKGROUND: A Brief History of Trade Wars, 1900-Present
Not surprisingly, sentiment-sensitive currencies such as the Australian and New Zealand Dollars rose at the expense of their haven counterparts. Fueling their momentum was the S&P 500 rising to achieve its highest close since early February. It won’t be much longer now until the index manages to reverse its declines from that tumultuous month where stronger wage gains fueled a panic in stocks.
The US Dollar had a rather mixed day. The improvement in risk trends dampened demand for the greenback given its status as the world’s reserve currency. That trait helped push it aggressively higher yesterday. US headline inflation clocking in at 2.9% y/y in June as expected failed to offer upside momentum given the focus in markets on sentiment.
We also had some commentary from a couple of Fed officials. Notably, Chair Jerome Powell spoke and said that the economy is in a good place, but that the inflation goal is not fully reached yet. Mr. Powell acknowledged the rising concerns about trade policy effects, adding that sustained high tariffs could be negative for the economy. Fed’s Patrick Harker also noted that those levies could sap business confidence and investment.
Additional Comments from Fed Chair Jerome Powell:
- Tax cuts, spending to support the economy for a few years
- Seen very gradual move up in wages
- Don’t know economic impact yet of trade actions
- Very pleased with results of gradual rate hikes
- Relatively low US labor force participation ‘not good’
- We are not declaring victory on reaching inflation goal
- Falling trade barriers have served the world, US well
Current Developments – Trump Targets UK for Next Trade Threat, GBP Down
Early into Friday’s trading session, the British Pound fell against its major counterparts as the US President aimed his next trade threat at the United Kingdom. Donald Trump warned Prime Minister Theresa May that her soft Brexit plan would ‘kill’ any future trade deals. The Us Dollar was quick to take advantage of Sterling weakness, heading cautiously higher.
Meanwhile, the New Zealand Dollar, partially weaker on the higher greenback, edged even more so cautiously lower when local business manufacturing PMI underwhelmed. In New Zealand, that reading fell to 52.8 in June from 54.4 in May. That was the weakest reading since December 2017, making it a new 2018 low.
Signs that the world’s largest economies can reach an agreement that results in smaller chances of additional tariffs stand to bode well for stocks. While sentiment may continue improving, the threat of a sudden revive in trade spats still hangs over the markets and risks sparking another brief panic. As such, currencies like the Japanese Yen and Australian Dollars may be vulnerable to volatility.
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IG Client Sentiment Index Chart of the Day: AUD/USD
CLICK HERE to learn more about the IG Client Sentiment Index
Retail trader data shows 63.3% of AUD/USD traders are net-long with the ratio of traders long to short at 1.73 to 1. In fact, traders have remained net-long since Jun 05 when AUD/USD traded near 0.75729; price has moved 2.1% lower since then. The number of traders net-long is 2.9% lower than yesterday and 7.8% lower from last week, while the number of traders net-short is 6.9% higher than yesterday and 1.6% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse higher despite the fact traders remain net-long.
Five Things Traders are Reading:
- AUD/USD Rate Eyes July-Low as Bearish Sequence Takes Shape David Song, Currency Analyst
- XAU/USD Technical Outlook: Moment of Truth for Gold Prices by Michael Boutros, Currency Strategist
- USD/JPY Remains Overbought Even as U.S. Data Fails to Impress by David Song, Currency Analyst
- Bitcoin: Retail Traders Stay Net-Long Despite 2 Month Downtrendby Jake Schoenleb, DailyFX Research Team
- Short EUR/USD After Break Below Support, Targeting May Lowsby Daniel Dubrovsky, Junior Analyst
— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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)
Check out these 4 core tenets for Building Confidence in Trading.
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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