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The BoJ is On Deck, but Beware of Risk Trends From FOMC, ECB

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Fundamental Forecast for JPY: Neutral

Talking Points:

Yen and US Dollar Aim Higher as Trade War Fears Swell Before G7.

USD/JPY Technical Outlook: Decision Time for the Japanese Yen.

– If you’re looking for long-term analysis on the Yen, check out our Quarterly Forecast for the currency.

Want to see how other traders are approaching USD/JPY? Check out our IG Client Sentiment indicator.

USD/JPY With a Second Consecutive Weekly Doji

It was another mixed week for the Japanese Yen, as the currency put in another indecision formation on the weekly chart of USD/JPY. This marks the second consecutive week of indecisive price action, and this happened even as a return of risk tolerance crept back into global markets, with both the Dow and S&P 500 setting fresh two-month highs while the Nikkei further recovered from the May sell-off.

USD/JPY Weekly Chart: Two Consecutive Weeks of Indecision

usdjpy usd/jpy weekly chart

Chart prepared by James Stanley

The big item this week out of Japan was the final read of Q1 GDP, which had previously indicated an annualized contraction of -.4%. GDP growth for last quarter was revised down to an annualized -.6%, and this is perhaps even more worrisome than initially thought as this contraction ended two consecutive years of GDP growth for Japan. The primary drag appeared to emanate from domestic consumption, and this comes from a continued lag in wage growth. Capital investment continues to grow, albeit at a moderate pace, and hopes are high that economic growth will resume after the Q1 pullback. While a match of last year’s 1.7% GDP growth might be a bit too optimistic, the prospect of strength returning to US and EU markets could help the Japanese economy get back on an upward trajectory.

The crux point for Japan continues to be inflation, which further fell in April after the earlier-year spike.

Japan Monthly CPI Growth Falls Back-Below 1% in April

Japan Monthly CPI Growth Since January, 2017

Chart prepared by James Stanley

The BoJ is On Deck

Next week brings a Bank of Japan meeting on Friday morning, and this takes place after rate decisions in the US and Europe. In the US, the wide thought is that we’ll see another interest rate hike on Wednesday, marking the second such move this year out of the Federal Reserve. The day after brings an ECB rate decision and, of recent, the growing thought is that we’ll hear the bank begin to talk about how they might plan to start tapering their QE purchases. Each of these rate decisions have the potential to be noteworthy, and the Japanese Yen could be swung in either direction on the basis of risk on/off forces that are derived from each of those respective meetings.

BoJ Inflation Forecasts – Will They Cut in July?

Cutting inflation forecasts has become a rather usual occurrence at the Bank of Japan, and a circulating report on Friday morning indicated that this may be in the cards yet again for the BoJ when their next outlook report is due at the end of July. This happened in April when the bank abandoned the target date for returning inflation to 2%, and they also cut the inflation forecast for 2018 to 1.3% from a prior 1.4%. Expectations for 2019 and 2020 remain at 1.8%, but this may be cut at the bank’s July rate decision along with another nudge-lower to 2018 expectations.

Forecast For Next Week

The forecast for the Japanese Yen will remain at neutral for next week. While the backdrop for continued Yen-weakness appears to be starting to line up, the currency remains vulnerable to risk aversion themes, particularly as we approach what could be a pensive European Central Bank rate decision.

To read more:

Are you looking for longer-term analysis on 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 USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX



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Forex

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

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Talking Points:

  • The severe tumble in risk trends last week wasn’t threatening market stability through the open session of this new week
  • DXY has offered little clarity on direction as primary motivation is itself unclear, meanwhile the deficit hit a 6-year high
  • Euro and Pound are seeing the quiet before their respective Italian and Brexit storms, be mindful of your trade intent with each

What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 4Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

Risk Trends Steady to Start the Week, the Threats Remain Numerous

Like a life raft encircled by sharks, the risk-leaning benchmarks opened this week with an air of stability while the fundamental threats to the system remain distinctly unresolved. Following last week’s painful collapse in US indices – a move that motivated risk aversion far and wide – Monday’s steadfast conditions were welcomed by harried bulls. The balance was not simply isolated to US equities. European and Asian shares markets registered small movements, the emerging markets offered a measured gap lower without hitting new lows and the Yen-based carry trade eased up on its retreat. Yet, despite the implications such a correlation across diverse markets represents, there is more loaded speculative potential packed into the next move from the S&P 500, Dow and Nasdaq. These indices are still running a considerable premium to nearly every other high-profile ‘risk’ metric even after the deeper rout. The technical picture accurately reflects the circumstances moving forward. All three are hovering just above major trendline support which could readily signal a medium-term reversal in trend if cleared – in concert, the move would get on far more radars. Far more important is the sheer number of possible catalysts that can tip us back into selling pressure – or cue a notable rebound. Anticipation of the US Treasury’s call on Chinese polices keeps trade wars in focus (see the history of a century of trade wars here). Yields are at the mercy of risk trends and US Treasury yields specifically at the command of China. Growth forecasts were downgraded this past week for an otherwise ‘mundane’ threat. Earnings season hits its first ‘FAANG’ update (Netflix) Tuesday after the bell. Then there are the regional threats, which we discus below.

SPX Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

Dollar Is a Fundamental Stalemate with Too Many Charges to Keep Tabs On

When trading FX, it is difficult to avoid the US Dollar. However, given the state of its fundamental predicament, that may be an effort worth making. Whether we reference the trade-weighted DXY Dollar Index or an equally-weighted measure, there is a distinct lack of bearing on the benchmark. The picture is appropriately reflect via EURUSD, the most liquid currency bar none. There is a multi-year head-and-shoulders pattern that the pair tentative broke in August only to reverse course before conviction could take. What eventually resulted was an inverse variation of the same pattern where the break above 1.1725 again fell apart. Now trading around 1.1600, the Greenback has shown little intent to champion either bullish or bearish interests for the time being. That is not likely due to a lack of meaningful fundamental charge but instead it is more likely a side effect of an overabundance of meaningful themes tugging at the currency. For risk trends, there is not enough intensity to raise the focus on the currency’s safe haven status, but even its carry position has yet to be provoked this week. One fundamental signal that was prodded this past session but still abstract for most is the currency’s position as the unquestioned reserve leader. This United States deficit for 2018 was projected to $779 billion which equates to a 3.9 percent ratio to GDP. That is the largest dip into lending for the government since 2012 and furthers the concern that the country pushing the financing tolerance of the ratings agencies. Until we see one of these key themes take command of the currency’s bearings, it will prove difficult to trace its course.

DXY Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

Euro and Pound Tension Will Only Build into the Wednesday-Thursday EU Summit

As the Dollar flounders fundamentally, its largest counterparts are honing in on very specific fundamental themes. Yet, where there performance is riding on a single track, the outcome and timing of these uncertainties are problematically open-ended. Form the Euro, we were reminded that the currency’s future is under pressure. Following the growing discord between the Italian government and their EU/Eurozone counterparts this past weeks, the Italian Deputy Prime Minister Salvini remarked that the country doesn’t feel bound by the EU’s deficit rules – making a finer point to previous remarks that the country could increase spending if they don’t meet a generous GDP forecast and their belief that the European Central Bank (ECB) would bail them out should financial conditions grow strained. Prime Minister Conte’s remarks today and the two-day EU Summit Wednesday and Thursday will prove crucial. These particular events will very likely be more market critical than the Eurozone and Italian trade reports or the region’s investor sentiment survey from ZEW. The British Pound will also have a lot invested in the two-day meeting of the European leaders. This is a crucial ‘crunch’ event for the UK and EU to hash out a clear path for the divorce known as ‘Brexit’ (learn about the different possible Brexit outcomes in this special report). If this summit ends without resolution, the Pound is likely to tumble. Just as readily, a positive outcome will trigger a rally. Yet, after the collapse of talks between chief negotiators over the weekend and Prime Minister May’s remarks in Parliament Monday, the Cabinet meeting ahead will more likely set this event for a crash landing.

GBP Index Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

New Zealand Dollar Jumps after CPI Beat, Reminds of the Virtues of Discounted Majors

As convoluted as the backdrop seems for the likes of the Dollar, Euro and Pound; there are still options for the studious FX traders. The Canadian Dollar was given a serious charge this past session when the third quarter business sale survey from the Bank of Canada (BoC) showed an significant improvement. The general sentiment figure and lending survey were decidedly less encouraging, but these were reading taken before the breakthrough on the stalled NAFTA negotiations. Now the focus for the Loonie will more likely fall to BoC intent, so the next major update comes from Friday’s inflation update. Meanwhile, the New Zealand Dollar was prompted to a rally of its own with the release of the third quarter CPI (consumer price index) update. The 1.9 percent clip is still a ways from the upper threshold on the Reserve Bank of New Zealand’s (RBNZ) tolerance band for price pressures, but it nevertheless makes the next move decidedly more hawkish rather than dovish. Given the deep discount on the Kiwi these past months and the lack of response from the currency to last week’s risk flush, there is naturally more response to the positive news. I would expect the same for the Australian Dollar moving forward, but there the key event risk comes with the local employment report and third quarter business sentiment survey which will hit the wires at the same time. We discuss all of this and more in today’s Trading Video.

AUD/NZD Daily Chart

Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught

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

Written by John Kicklighter, Chief Currency Strategist for DailyFX.com



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Weekly Short Positions Increase 14% Sparking Bullish Bias

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GBP/USD: Weekly Short Positions Increase 14% Sparking Bullish Bias

Weekly Net-Long Positions Increase 17%

GBPUSD: Retail trader data shows 57.7% of traders are net-long with the ratio of traders long to short at 1.37 to 1. In fact, traders have remained net-long since Sep 20 when GBPUSD traded near 1.31492; price has remained unchanged since then. The number of traders net-long is 0.7% lower than yesterday and 19.9% lower from last week, while the number of traders net-short is 10.4% higher than yesterday and 14.9% higher from last week.

Having trouble with your strategy? Here’s the #1 mistake that traders make.

GBPUSD Sentiment Suggest That Price Could Rise

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD 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 GBPUSD price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Jake Schoenleb, DailyFX Research



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Euro Reversal Eyes Initial Resistance Hurdle

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Euro reversed off confluence support last week with the advance now approaching the first major resistance hurdles. Here are the updated targets and invalidation levels that matter on the EUR/USD charts heading into the start of the week. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.

EUR/USD Daily Price Chart

EUR/USD Price Chart - Daily

Technical Outlook: Earlier this month in my EUR/USD Weekly Technical Perspective we highlighted a key support zone at in Euro at 1.1436/97 (low-week reversal close and the 61.8% retracement of the August advance). Price registered a low at 1.1432 on October 9th with the subsequent rebound faltering just ahead of a key resistance confluence at 1.1617/27 – a region defined by the monthly open & opening-range highs, the 50% retracement of the late-September decline and the 100-day moving average. A breach above this level targets 1.1669 (breakout-zone for the Euro). Initial daily support rests at 1.1529 backed by the monthly low-day close at 1.1491.

New to Forex Trading? Get started with this Free Beginners Guide

EUR/USD 240min Price Chart

EUR/USD Price Chart - 240min

Notes:A closer look at near-term price action shows Euro trading within the confines of an ascending pitchfork formation extending off the October lows. Note that the upper parallel converges on the 1.1617/27 resistance zone and further highlights the technical significance of this region. Initial resistance rests with the median-line (currently 1.1550s) backed by 1.1521/29 with near-term bullish invalidation now raised to 1.1497-1.15.

Why does the average trader lose? Avoid these Mistakes in your trading

Bottom line: EUR/USD is approaching near-term resistance targets which could see prices pullback a bit. From a trading standpoint, look for possible price exhaustion on a rally into 1.1617/27 – the trade remains constructive while above 1.15 with a breach above 1.1669 needed to fuel the next leg higher in price. The October opening-range is set – for now, I’ll favor fading weakness while within this formation. Keep in mind the EU-UK summit is on tap this week as well and may fuel increased volatility in the Euro & GBP crosses.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

EUR/USD Trader Sentiment

EUR/USD Trader Sentiment

  • A summary of IG Client Sentiment shows traders are net-long EUR/USD – the ratio stands at +1.12 (52.8% of traders are long) – extremely weak bearishreading
  • Traders have remained net-long since October 1st; price has moved 0.2% lower since then
  • Long positions are7.8% lower than yesterday and 13.5% lower from last week
  • Short positions are 5.9% higher than yesterday and 0.3% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Yet traders are less net-long than yesterday & compared with last week andthe recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.

See how shifts in EUR/USD retail positioning are impacting trend- Learn more about sentiment!

Relevant EUR/USD Economic Data Releases

EUR/USD Economic Calendar

Economic Calendarlatest economic developments and upcoming event risk. Learn more about how we Trade the News in our Free Guide!

Active Trade Setups

– Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex or contact him at mboutros@dailyfx.com

https://www.dailyfx.com/free_guide-tg.html?ref-author=Boutros



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