– US CPI for the month of May printed in-line with expectations at an annualized 2.8% on the headline read, opening the door for a rate hike out of the Federal Reserve at tomorrow’s rate decision. With a hike at tomorrow’s meeting long-expected, the bigger question is what the bank might be looking for in the second half of the year. At our last quarterly meeting in March, the central expectation at the bank was for three hikes, which would allude to one more after tomorrow’s move. Has the last quarter produced a backdrop with which the Fed can get more hawkish in the second half of 2018, looking for an additional two hikes to bring the total for this year to four?
– The US Dollar posed a muted reaction around this morning’s inflation release, highlighting the fact that market participants are looking ahead on the economic calendar, as the next few days bring a considerable amount of potential for volatility. The Fed’s rate decision is followed by the ECB on Thursday morning, and after last week’s reports that the bank may begin to discuss options around stimulus-taper, Euro has recovered from the May swoon that was driven by an uptick in political risk.
– DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.
Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.
US Inflation Prints In-Line for May, Focus Moves to FOMC, Tomorrow at 2PM ET
Tomorrow afternoon brings the June rate decision out of the Federal Reserve, and a hike at tomorrow’s meeting has long been expected. At this point, we can move forward with the reasonable expectation that tomorrow’s move is already priced-in, and market participants’ focus is looking ahead to what the bank is looking for in the second half of this year. This will be delivered via the dot plot matrix, and at our last quarterly meeting in March, the central expectation was for a total of three hikes in 2018, which would entail one additional move after tomorrow. This would allude to another hike in either September or December; but should the Fed signal a fourth potential hike this year, we could see USD-strength continue as markets begin to price-in a more hawkish Fed.
At this stage, the US Dollar is holding the support area that we looked at last week, and this takes place around the 23.6% Fibonacci retracement of the recent bullish move.
US Dollar via ‘DXY’ Daily Chart: Support Holds Around 23.6% Fibonacci Retracement
Chart prepared by James Stanley
On a shorter-term basis, a bear flag formation appears to be forming after a couple of different failed tests at that longer-term support last week. This has produced an upward-sloping channel on the hourly chart that appears to be corrective in nature, and this can keep the door open for shorter-term bearish strategies around the Greenback as we move towards tomorrow’s rate decision.
US Dollar Two-Hour Chart: Bullish Channel Off of Support, Potential Bear Flag Scenario
Chart prepared by James Stanley
EUR/USD Back Above Key Support
The European Central Bank is waiting in the wings for their own rate decision less than 24 hours after the Fed announces; and last week’s report that the ECB may roll-out details on stimulus taper has helped EUR/USD to recover after an aggressive sell-off lasted for most of the month of May. In that sell-off, EUR/USD sank below a big zone of support that runs from 1.1685-1.1736. The price of 1.1685 is the 23.6% Fibonacci retracement of the 2008-2017 major move, while 1.1736 is the 38.2% retracement of the 2014-2017 move (the ECB QE-fueled sell-off in the pair). Perhaps more importantly, this zone has elicited numerous examples of both support and resistance, helping to hold the lows on multiple occasions in the latter-third of last year, with price only falling through after the ECB extended stimulus into 2018, at which point this area showed as resistance.
EUR/USD Daily Chart: Prices Re-Engage Above Key Support Zone
Chart prepared by James Stanley
A couple of weeks after that stimulus extension from the ECB, a red-hot German GDP report was issued and prices quickly re-engaged above this zone. After a support test in late-October, and again in December, prices launched up to fresh multi-year highs, eventually failing at the 1.2500 level.
When the Euro sell-off was hitting full speed in May, this area acted as a mere speed bump. We then saw a couple of days of resistance, and last week’s report of a potential announcement of stimulus taper has helped prices to move back above this zone. Since then, we’ve seen a hold of that support on a couple of different tests, and this has helped to produce a bullish pennant in short-term EUR/USD price action.
EUR/USD Two-Hour Chart: Bull Pennant, Support at Prior Resistance After Higher-Highs, Lows
Chart prepared by James Stanley
If EUR/USD holds above this support zone through this week’s FOMC and ECB rate decisions, the door remains open for a deeper recovery in the pair, targeting towards the 1.2000 level. This is something traders should approach cautiously, as the European Central Bank may not yet be in a position where they can fully forecast the end of QE. This may be more of an opportunistic attempt at the bank to begin talking about the prospect of stimulus exit while the Euro is very weak.
GBP/USD Remains in Bear Flag – UK Inflation is On Deck
Before tomorrow’s FOMC fireworks we get an updated look at inflation in the UK. This has very much been a push point for the British Pound of recent, as the high rates of inflation that were seen in the latter-portion of last year, pushing rate expectations around the Bank of England higher, have dissipated as we’ve traded into 2018. Last month’s inflation showed further drawdown, printing at an annualized 2.4% for the third consecutive month of slower price growth.
Softening Inflation Makes Less Concerted Case for Higher Rates from BoE
Chart prepared by James Stanley
While a 2.4% read still remains above the Bank of England’s 2% target, the fact that we’re not seeing the same 3% prints from last year highlights inflation weakness. This softening in inflation may keep the Bank of England from hiking rates in August, or November, as the BoE still remains rather cautious around Brexit-related risks.
Tomorrow’s inflation release of May data will be helpful for evaluating the potential around this theme. In GBP/USD, the bear flag formation that we looked at last week remains, and the support side of that channel is in the process of being tested. Last week saw a failed attempt to test the prior support zone that runs from 1.3478-1.3500; but sellers showed up ahead of that area and price action has continued to run within the framework of this channel. This keeps a bearish tonality in the pair, and GBP/USD remains as one of the more attractive options for working with USD-strength as we move towards tomorrow’s UK CPI report, and the Fed meeting on the calendar for later in the day.
GBP/USD Daily Chart: Testing Support in Bear Flag Formation
Chart prepared by James Stanley
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.
Forex Trading Resources
DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.
If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.
— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
Dollar, Euro and Pound Trading Over the Coming Days is Going to Be Fraught
- 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 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
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
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
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
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
Euro Reversal Eyes Initial Resistance Hurdle
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
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.
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EUR/USD 240min Price Chart
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
- 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
Active Trade Setups
– Written by Michael Boutros, Currency Strategist with DailyFX
Follow Michael on Twitter @MBForex or contact him at email@example.com
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