In this webinar, we used price action to look at macro markets in the aftermath of this morning’s US CPI report. That report showed continued strength in US inflation as we’ve now had the sixth consecutive month of at-or-above-target inflation as we approach next week’s FOMC rate decision. But, despite the backdrop for higher rates as driven by consistent inflation gains, the US Dollar remains weak as the year-long down-trend remains in order.
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US Dollar Takes a Hit After CPI
This morning’s CPI print out of the US was not all that bad, as we saw the sixth consecutive month of at-or-above target CPI growth ahead of next week’s Federal Reserve rate decision. But the reaction in the Dollar was a pronounced move of weakness that syncs well with the timing of this morning’s CPI release, even though many are attributing this downdraft in the Greenback to the morning announcement of the firing of Secretary of State, Rex Tillerson. And while there may be something there, the fact of the matter is that most drivers, both positive and negative, have brought upon the same net result of USD-weakness. This alludes to the fact that there is something else going on here helping to drive weakness into USD even in-light of seemingly positive factors, like inflation pushing the Fed towards tighter policy options. This can help to keep the bearish trend in the US Dollar at the forefront as we near next week’s FOMC rate decision.
US CPI: Sixth Consecutive Month At-Or-Above Target, USD Falls in Response
Chart prepared by James Stanley
EUR/USD Support Bounce Runs to 1.2400
Last Thursday we looked at support in EUR/USD, and we’ve since seen a respectable recovery from the ECB-fueled dip to 1.2280. The problem at this point is the fact that we’re so far away from support that bullish setups could be difficult to justify. A pullback to the prior support zone of 1.2335-1.2350 keeps the door open for additional topside in the pair; perhaps even to another approach towards the 1.2500 psychological level.
EUR/USD Four-Hour Chart: Approaching Last Week’s Highs After 2280 Support Visit
Chart prepared by James Stanley
GBP/USD Catches a Bid After Spring Statement
Growth forecasts were upgraded this morning in the UK’s Spring Statement, and this has brought some life into the British Pound. This helped GBP/USD to break above a bearish trend-line that’s held in the pair since late-January. This can start to open the door for short-term top-side setups, but for the longer-term move, traders will likely want to await a bullish break of the 1.4000 psychological level, as stops can be difficult to justify given recent swing-lows.
GBP/JPY Approaching Under-Side of Post-Brexit Trend-Line
For short-side GBP plays, GBP/JPY may be getting close to a point of interest, as there is a bit of confluence around 149.41, as we have both the 38.2% Fibonacci retracement of the February sell-off along with the projection of the post-Brexit trend-line that had previously done a good job of helping to carve-out support.
AUD/USD Rallies to Resistance Zone
While the US Dollar has been exuberantly weak this morning after that CPI report, AUD/USD has started to show what could finish as an indecision candlestick on the Daily chart. Resistance is coming-in around a zone that we’ve been following around the .7900 level, and this can start to open the door to short-side setups. We looked at how lower time frames can be used to assist with timing into the setup; allowing for traders to let the move start to show before looking at fading what’s been a really strong short-term trend. This was previously a favored long-USD candidate, and with today’s resistance starting to show even as the US Dollar remains weak, that door may be re-opening around the Aussie.
NZD/USD Testing Longer-Term Fibonacci Resistance
We’ve been following a level in NZD/USD that’s started to come into play, and now its time to watch what the pair does to see if this is a workable theme. The level in question is the 38.2% Fibonacci retracement of the 2009-2011 major move at .7335, and this level has done a great job of helping to form resistance on the weekly chart over the past couple of years. With a really weak US Dollar running into a strong NZD in February, the pair was able to temporarily eclipse this value, leading to a fall to .7200. But since that support showed at .7200, prices have been on the way up and we’re now re-testing .7335 again.
We looked at the hourly chart to focus-in on this recent strength, and how a break below a short-term trend-line can start to open the door to short-side setups.
USD/CAD Comes Back to Life After 1.3000 Resistance
Last week saw a really weak Canadian Dollar as USD/CAD testing the 1.3000 psychological level. After three days of tests Monday-Wednesday, USD-weakness took over and drove the pair down to 1.2800. Since then, we’ve seen more recovery as CAD-weakness has remained a dominant theme. We’re now catching resistance around 1.2928, which is the 50% Fibonacci retracement of the May-September sell-off from last year. We looked at how shorter-term charts can be used to work with the current setup in USD/CAD.
Yen-Weakness Pronounced Ahead of BoJ Minutes
There appears to be a brewing theme around the Japanese Yen that should get some more information tonight with the release of BoJ meeting minutes from last week’s rate decision. Yen-strength has become quite pronounced in 2018, and this goes along with a consistent rise in inflation that saw January come-in at 34-month highs. This is similar to the Euro and the ECB last year, where stronger growth and inflation led markets to buy the Euro in anticipation of an eventual move away from stimulus. While we’re still waiting on confirmation of that move away from stimulus, Euro-strength remains; and in the Yen, that strength has crafted a fresh yearly-high against the US Dollar. Starting around the Tokyo open last night, however, was a spate of Yen-weakness that had begun about 24 hours ahead of the release of those meeting minutes.
USD/JPY Weekly Chart: Support Holding on at a Long-Term Area of Interest
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the Euro, the British Pound or the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our EUR/USD, GBP/USD, USD/JPY, AUD/USD and U.S. Dollar pages. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
— Written by James Stanley, Strategist for DailyFX.com
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If You Build It, Will They Buy? A Demand Led World
Fundamental Factors Focus:
- US optimism peaking, which may mean the risky asset rally has further to run
- Aggressive supply of base metals, energy is increasingly dependent on global demand picture
- Signs of a ‘dollar shortage’ that aligns with risk off markets remain absent
Capital flows, business activity, a premium of borrowing costs, and consumer confidence are foundational components of an economy that sees investors rushing into risky assets, and shying away from investments that don’t capture the upside.
Optimism Reigns Stateside
Two data points have recently moved to extremes not seen since the kick-off of the Regan economic boom in the early 1980s that saw interest rates and inflation drop alongside tax cuts enacted that boosted confidence and productivity.
3 Measures Of Economic Activities Hitting Multi-Cycle Highs, Recession Unlikely
Data source: Bloomberg, Chart created by Tyler Yell, CMT
The first data point, the Institute for Supply Management (ISM) Manufacturing Business Survey just aligned with the NFIB small business optimism index to hit levels not seen in years. For the Small Business Optimism Index, it recently reached the highest level since 1983 where the ISM hit a 13-year high last month.
Friday morning also saw a 14-year high of the University of Michigan Consumer Confidence reading with an all-time high with the current conditions gauge that measures American’s perception of their personal finances hitting an all-time high.
What is worth noting in both cases is that both in the early 80s, and ISM in May 2004 was seen at the early- to mid-point of an economic expansion. Should a similar development be in place, traders should keep their low-probability high-impact scenarios saved for their NCAA March Madness Brackets, and the high-probability mid-impact events applied to investing.
In other words, and as I argue in Ichimoku Charts that Matter, shocks tend to happen in the direction of the trend. Rallies typically don’t end with a bang opposing extreme optimism like we see now, but rather, rallies tend to rollover, and the sharp downside moves that make headlines that turn into a bear market often come off a bad news crescendo when investors tend to sell first, and ask questions later.
Currently, we seem to be far away from a rollover as optimism reigns supreme. Also, aside from the 2001/2 recession, peaks in confidence tend to happen early- to mid-cycle favoring an extension of the current risky-asset buying environment.
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You Can’t Have Demand without Optimism, and Demand Is up per Oil Data
Two stories in the commodity world that have come to surface in recent months is the aggressive supply of crude oil from US shale producers that is running counter to the plans of OPEC and strategic alliance like Russia to reduce the supply glut.
Another focus has been on supply from China regarding steel and aluminum. The supply remained uncomfortably high for many despite the winter production curbs and enforced reduction and in some cases, halting of supply from ‘rogue’ metal suppliers. The trade tariff’s from US President Trump appear squared on China and Europe, and could cause the supply from China to not be adequately absorbed, and may put pressure on prices if optimism and demand do not stay supported.
However, in Crude’s case, at least when looking at IEA projections, demand is making the aggressive supply coming online be quickly absorbed. The monthly IEA report predicted a widening supply deficit forming later this year due to the decline in Venezuela’s Oil Production due to their own economic turmoil. The IEA forecast could mean that the global oil inventory surplus would disappear in H2 2018.
While demand is exciting in the short-term, supply is often stickier. Suppliers tend to look at their supply as prophetic, and a fall of demand is often seen, and hoped to be temporary. That is the pickle that global oil producers found themselves in during the 2013-2014 supply build up as demand fell-off and eventually sent Brent Oil to $30/bbl, before a sharp bounce took in early 2016.
Crude Oil And Crude Produce Stockpiles Continue To Fall On Higher Demand
Data source: Department of Energy, Bloomberg
Next Arrow in the Bull’s Quiver, No Dollar Shortage in Sight
Data Source: Bloomberg
Out of the gates of the Great Financial Crisis was a sharp inverse correlation between the US Dollar and riskier asset price levels. A large factor in this development was the view that there was a US Dollar shortage and demand for haven assets as investors remained unsure of the sustainability of the feeble recovery.
One of the metrics looked at in the financial market is sometimes referred to as the market’s plumbing or liquidity around the reserve currency, the US Dollar. The market that is utilized to see ‘funding stress’ or a ‘dollar shortage’ is the cross currency basis swap or when a currency from one investor is exchanged for another currency based on swap rates calculated from each country’s yield curve.
The chart above shows the rising LIBOR-OIS spread, which indicates a higher interbank borrowing cost over the implied Fed reference rate. While the spread is widening, stress that typically aligns with Dollar strength and a ‘dollar shortage,’ appears no where insight. The orange line shows the 3M EURUSD 3M cross currency basis swap with sharp downspikes showing funding stress. The lack of funding stress with the stable orange line means that traders looking for an aggressive dollar rally based on the shortage of USD argument could be waiting a while for their anticipated outcome to play out.
As a swap contract, there is no value on initiation, and the market value is based on demand for once currency or another. When looking at the EUR/USD or USD/JPY cross currency basis swap, you can see if a ‘dollar shortage’ is developing or whether they were plenty of dollar in the system such that the swap shows less of a demand for US Dollars.
Given the typical inverse correlation to the US Dollar and risky assets, a weaker dollar or lack of dollar supply like the chart above shows could mean that the risky asset rally has room to run as the other points make sense.
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US Dollar on Offensive Before Fed Rate Decision. Will it Last?
Fundamental Forecast for the US Dollar: BULLISH
- US Dollar fell on in-line CPI data, then rallied into Fed meeting
- Pre-emptive gains hint markets worried tightening will accelerate
- Policy bets tellingly dwarfing news-flow from Washington DC
Join our webinar for live coverage of the FOMC rate decision and its impact on the US Dollar!
A week marked by seesaw price action ended with a spirited push higher for the US Dollar. The rally was especially notable in that it occurred without an obvious fundamental catalyst. The week’s top data point of interest was February’s CPI print. The headline inflation rate printed exactly in line with forecasts at 2.2 percent, which eased worries about Fed rate hike acceleration and sent the greenback lower. A weekly bottom started taking shape a mere five hours later however, from which it rallied into Friday’s close.
The recovery tracked a parallel rise in front-end US Treasury bond yields. That this occurred after the influence of the CPI release subsided appears telling. The next bit of noteworthy event risk would not come until the FOMC monetary policy announcement on March 21. After newly minted Fed Chair Jerome Powell led a hawkish pivot in officials’ rhetoric in recent weeks, it seems entirely reasonable to suspect that it may mark a pickup in the expected pace of stimulus withdrawal. The Dollar’s rise then look like pre-positioning.
The priced-in rate hike trajectory implied in Fed Funds futures for 2018 has stabilized around 75 basis points, matching the Fed’s own forecast. Investors’ view for 2019 remains modest however. One rate hike is expected and the odds of a second are seen as worse than even. Nothing is on the books for 2020. That leaves plenty of scope for the Federal Reserve to signal a more assertive disposition. The first post-announcement press conference with Chair Powell presents a further opportunity to reinforce the pivot.
The US currency’s preemptive rally telegraphs the markets’ concern with such an outcome. Momentum will probably slow ahead of the announcement, with traders unwilling to commit until after it hits the wires. When that happens, fireworks are likely. The Fed’s primacy in shaping trends coupled with a tame docket in the days thereafter also means follow-through faces few obstacles. Indeed, short work was made of Rex Tillerson’s actual ouster from the Trump administration and H.R. McMaster’s rumored one last week.
FX TRADING RESOURCES
— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com
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GBP: From Famine to Feast
- UK data releases include, Inflation, jobs and wages
- Bank of England MPC announcement
- EU Council meeting on the EU/UK transition period.
Fundamental Forecast for GBP: Neutral
While we remain neutral on Sterling at this current point, GBP may be in for a rocky ride next week with market moving data points including inflation, jobs and wages as well as the latest monetary policy announcement from the Bank of England. And just to round the week off, the EU Council will meet on Thursday/Friday to discuss the latest EU/UK transition period documents with UK businesses waiting for the outcome.
The latest inflation and wages data may well see the gap between the two narrow further – inflation expected to slip lower/wages expected to tick higher – giving the UK consumer more money in their pocket. The recent negative real wage gap has weighed on the UK retailers in particular and any narrowing of the gap may bring welcome relief to the high street.
The Bank of England is expected to leave all monetary policy levers untouched on Thursday but any change in voting pattern on rate hikes, or hawkish commentary in the accompanying statement may cement a rate hike at the May meeting, boosting the British Pound.
The UK and the EU are targeting next week’s EU Council meeting to finalise a Brexit transition period, giving government and businesses the clarity the require to build for the future. While negotiations have taken a slight turn for the better of late, with both sides adopting a more conciliatory tone, there possibility of a last-minute hitch is still very real, an event that would hit both GBP and EUR lower.
GBPUSD Price Chart Three Hour Timeframe (February 27 – March 16, 2018)
— Written by Nick Cawley, Analyst.
You can contact the author via email at firstname.lastname@example.org or via Twitter @nickcawley1.
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