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US Dollar, EUR/USD Hold Support Ahead of FOMC, ECB

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Talking Points:

– 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

US Dollar usd daily chart

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

US Dollar usd two-hour chart

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

EURUSD eur/usd daily chart

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

eur/usd eurusd two-hour chart

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

UK Inflation monthly CPI Since February, 2017

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

gbpusd gbp/usd daily chart

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



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Forex

British Pound Volatility Continues and a Break Is Inevitable…

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British Pound Talking Points:

Looking for a fundamental perspective on Crude oil? Check out the Weekly Crude Oil Fundamental Forecast.

Technical Forecast for British Pound: Neutral

My technical outlook for the British Pound over the coming week is neutral…but that doesn’t mean it will be quiet. In fact, the reality is likely to be exactly the opposite of the calm that a ‘neutral’ setting would imply. It is likely that the currency maintains its struggle to set a clear and consistent course through the near future, but volatility will likely remain explosive for the currency. There is little surprise that Brexit is a key concern for the currency and charts traders should not write off that fact just because it strays into the fundamental realm. So long as the headlines signal that there is no clear course for the UK’s divorce from the European Union, the market will not fully commit to a clear direction on the currency. There is too much influence tied into the state of the economic relationship (readily seen in EURGBP) for the more stoic and systemic market interest behind Sterling capital flows to make a commitment.

In the absence of this deep current to stabilize markets, more volatile and speculative elements will exert greater influence over price action. Hence, we are left with exceptional volatility but limited capacity to spark a trend. Below is an equally-weighted index of the Pound with a 20-day average true range (ATR) as a percentage of current spot. The activity measure is at its highest levels since November 2016 – shortly after the initial Brexit detonation. Tight ranges do not survive such volatility for long. It can readily lead to ‘technical breaks’ but it doesn’t necessarily offer the transition to a reliable trend unless underlying speculative hurdle is crossed. This is one of those times where technical traders should keep tabs on the ‘other’ analytical technique.

Chart of an Equally-Weighted Pound Index with 20-Day ATR as Percentage of Spot (Daily)

British Pound Volatility Continues and a Break Is Inevitable…

From the benchmark GBPUSD, we find the same general conditions registered from the Sterling index above: there is considerable volatility with unmistakable range. The volatility range on this particular pair is similarly very high but not as extreme as the individual currency in relief – the Dollar’s restraints likely bear on this relationship. To the topside of this pairs, we have a resistance just shy of 1.3400 born of the confluence in a rising trendline of highs back to July as well as the midpoint of the 2018-2019 bear wave. The lower threshold is less overt. The 200-day moving average and a short-term (though questionable due to the January flash crash) trendline coincide around 1.2975/95. I would hold neither to hold up against further bouts of extreme volatility nor to spark a reliable trend.

GBPUSD and the 50-day and 200-day Moving Averages (Daily)

GBPUSD & CBOE Volatility Index

For those that follow volatility measures regularly in their analysis, the paths of implied (expected) and historical (realized) activity measures can offer more distinctive insight on the markets. Below is the GBPUSD overlaid with the CBOE’s volatility index derived from the same pair. On a close-over-close basis, the measure is remarkably high but it didn’t overtake the November peak when Prime Minister May’s withdrawal proposal worked out with the EU was rejected and the future of the Brexit proceedings were thrown into disarray. However, if we look at the measure on an intraday basis, it charged to the highest since the aftermath of the initial Brexit vote (the later months of 2016). A comparison of this measure and the 20-day ATR can offer useful analysis.

Chart of GBPUSD and the CBOE’s Pound Volatility Index (Daily)

EURGBP & 50 Day Moving Average

Another important cross to watch for those that want to get a technical perspective of a fundamentally-distracted currency is EURGBP. The Pound is the focal point of Brexit but the Euro (and EU) have as much to lose if the negotiations turn out poorly. This pair is therefore understandably afflicted. The 20-day ATR here is extreme and it serves as a good reminder that technical boundaries are not the only consideration when trading Sterling. The slide through 0.8625 back in March was a long-term range support break and it seemed like the tides would shift on a multi-year congestion pattern that followed an impressive rally from the pair. As significant as the cue was, momentum would never set up camp. Friday’s drop was the second largest single-day loss in two years. That is the kind of situation we are dealing with here – not the slow and methodical setup to a inverse head-and-shoulders pattern that you may expect from a look at just levels.

Chart of EURGBP and 50-day Moving Average (Daily)

EURGBP & 50 Day moving Average

From the third most liquid Pound-based major, we have a combination of the Sterling’s own volatility and the addition of the Yen’s penchant to reflect market volatility. Here, the floor of a rough rising trend channel from the January flash crash is mingling with the 50-day and 200-day moving averages around 144.25/75. I would not expect this zone of support to be respected should we feel subsequent waves of volatility similar to what we’ve experienced the past two weeks. For what it’s worth, the collective resistance the trendline pulled from a descending series of highs and 38.2 percent Fibonacci retracement of the February 2018 high to flash crash low (excluding the tail) around 148.75 would likely carry greater weight. Yet, the higher the volatility, the more intangible the border becomes.

Chart of GBPJPY along with 50-day and 200-day Moving Averages (Daily)

GBPJPY and 50 & 200 Day Moving Average

Finally, a look at speculative positioning reveals there is an intent gap between the larger and smaller players in the market. The large speculators measured in the CFTC’s Commitment of Traders (COT) report reveals that futures traders of size took a considerable gamble by significantly shifting away from the net short view through Tuesday (when the data collection stops for the week). They were likely expecting a Brexit breakthrough and the same from the Cable. That didn’t occur. It is also true that total speculative interest is softening in the face of volatility. Retail traders are not so put off by the activity levels. While total retail positions measured by IG’s Client Sentiment data has been consistent, the swing between a net long and net short position has been dramatic. Reactive and range bound market conditions are what retail traders typically look for – dangerous but temporarily appropriate. Follow what retail traders are doing, but they will likely put more faith in technical boundaries than our current conditions general deserve.

Chart of Net Speculative Positioning in Dollar Futures Positions from CFTC Report (Weekly)

Speculative Positioning

Chart of Retail Trader Positioning from IG Clients (Daily)

GBPUSD IG Client Positioning

Other Weekly Technical Forecasts:

Australian Dollar Forecast – AUD/USD Rebound Stalls Post-Fed

Oil Forecast – Evening Star Prints as $60 Breakout Fails



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Evening Star Prints as $60 Breakout Fails

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Crude Oil Price Forecast Talking Points:

– The 2019 rally in WTI Crude Oil continued this week as prices re-tested the $60 level on the chart around the Wednesday FOMC rate decision. Prices put in a day of indecision on Thursday followed by a sell-off on Friday, making for an evening star formation on the Daily chart, which will generally be approaches in a bearish manner.

– The bigger question is whether that evening star formation may be showing pullback potential or whether a larger reversal may be in the works. If risk aversion does continue to show, as was seen in early-Friday trade, the probability of a deeper reversal becomes stronger. But, at this early stage, there is little evidence to support that thesis as Oil prices remain well-elevated from potential areas of support around $57.25-$57.50 (which was resistance in early-March) and $54.50-$55.50. Until those supports are broken, the bullish 2019 trend can remain as workable.

Do you want to see how retail traders are currently positioned? Check out our IG Client Sentiment Indicator.

Technical Forecast for USOil: Bullish

The bullish 2019 trend in Oil ran into resistance this week, with prices temporarily pushing over the $60-level before sellers made a showing. And while 2019 trade has been considerably more upbeat and optimistic than the sell-off from Q4, prices failing to trade through a key area of resistance on the chart brings to question the near-term viability of bullish continuation in Oil prices as the final week of Q1 approaches.

Crude Oil Monthly Price Chart

WTI Crude Oil Monthly Price Chart

Chart prepared by James Stanley

Crude Oil Daily:

This week saw crude prices rally through the FOMC rate decision and into Thursday trade, at which point sellers showed-up to push prices back-below the $60 level. The sell-off continued through a key Fibonacci level on the chart at 59.64. The three-day candle formation has built into an evening star pattern, which involves an initial day of strength running into a day of indecision; followed by a sell-off that takes-out at least half of the gains from day one.

This keeps the door open for a short-term move of weakness down to the confluent Fibonacci zone that runs from 57.25-57.50, in which exists 38.2% retracements from both 2014-2016 and 2016-2018 major moves. This would be categorized as a pullback in the longer-term trend that’s held so far through 2019; and that theme can remain workable as long as prices trade above the March swing-low around $54.50.

Crude Oil Daily Price Chart

Crude Oil Daily Price Chart

Chart prepared by James Stanley

Timing Exposure in WTI Crude Oil

Given the culmination of the above factors: A strong bullish trend that’s held for the past few months running into a very obvious level of resistance at the psychological $60 handle, at which point a bearish formation had printed; and traders looking to onload bullish exposure may want to wait for a more optimal backdrop before looking to take on risk.

If the current retracement can push prices down to find support at the prior area of resistance, right around that confluent Fibonacci area discussed above, bullish trend strategies can become attractive. If that zone is unable to hold the lows, there’s another block of potential support around the $54.50-$55.50 area. If this zone comes into play, meaning there was a failure from buyers to hold support around $57.25, traders would likely want to utilize a bit of patience in waiting for support to actually build before looking to take on long exposure. Once that criteria is satisfied, the door can soon re-open for bullish strategies, targeting a resistance re-test of the $57.27 area on the chart.

Crude Oil Four-Hour Price Chart

Crude Oil Four Hour Price Chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q4 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 an abundance 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

Other Weekly Technical Forecasts:

Australian Dollar Forecast – AUD/USD Rebound Stalls Post-Fed



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Rising Global Growth Concerns Sink Oil Prices

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crude oil weekly recap, crude oil price chart

Fundamental Forecast for Crude Oil: Neutral

News early in the week that OPEC would be canceling their April meeting initially help Crude Oil prices rally into their highest level since November 12.

– As more of the US Treasury yield curve sinks into inversion territory, concerns about the state of the US economy and global growth in general have flared – hitting oil prices hard by the end of the week.

– The IG Client Sentiment Indexshows that retail traders are buying the Crude Oil dip – a contrarian signal that more losses may be yet to come.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

Crude Oil Weekly Price Recap

After climbing through the first four days of the week to hit their highest level since November 12, Crude Oil prices dropped dramatically on Friday as a fresh wave of concern over the state of the global economy provoked a sell-off in high beta assets, growth-related commodities, and the risk-correlated currencies. The -1.97% drop on Friday saw Crude Oil cut its gain for the week down to 0.89% overall. Heading into the last week of the month, Crude is up by 3.18% since the start of March.

OPEC Meeting Cancellation Suggests Supply Will Remain Tight

The positive performance by Crude Oil last week can be attributed directly to a report on Monday that said that OPEC would not meet in April. Evidently displeased with the state of global demand, the major oil producing countries are intent on keeping the supply cuts in place until at least their next meeting in June. Against a backdrop where the Trump administration may announce fresh sanctions on Iran and Venezuela, a prospective constrained supply picture over the next few months has quickly emerged.

Global Growth Concerns Rise as US Treasury Yield Curve Continues to Invert

Even as it appears the global energy supply will be constrained over the near-term horizon, markets may have reached their breaking point with respect to concerns over the global economy. The March Fed meeting on Wednesday jumpstarted the drop in yields on Wednesday, but the US Treasury yield curve’s inversion by the end of the week may have been the proverbial straw that broke the camel’s back.

While the US Treasury yield curve has been inverted at various points since late last year, it was only recently that we started to see the key spreads – the 3m5s and 3m10s – move into inversion territory for the first time since 2007.

Why does the US yield curve inversion matter? In the post-war era, every occasion in which the 3m5s and 3m10s yield curves have remained inverted for two consecutive quarters has pre-dated a US recession 100% of the time. Crude Oil prices may prove to be disadvantaged in an environment where global growth concerns begin to pick up.

Inventory Data Due Out on Wednesday

The latest round of API inventory data showed that US crude inventories dropped by an unexpected 10M barrels, but a look under the data’s hood shows that nearly 70% of the drawdown was related to an uptick in exports (reflecting the aforementioned supply concerns). Amid market participants proving increasingly jittery over global growth, another round of data that show supply remains tight could prove to help buoy Crude Oil prices come mid-week.

Latest COT Data Shows Longs Continued to Build

crude oil price, cftc cot, oil positioning

Finally, looking at positioning, according to the CFTC’s COT for the week ended March 19, speculators increased their net-long Crude Oil positions to 414.8K contracts, up from the 362.3K net-long contracts held in the week prior. Net-longs have now climbed for the past five consecutive weeks after bottoming out during the week of February 12, 2019. Positioning remains a significant distance from the highs seen over the past two years, which were 739.1K net-longs during the week of February 6, 2018.

IG Client Sentiment Index: Crude Oil (March 22, 2019)

ig client sentiment index, crude oil price chart

Retail trader data shows 54.1% of traders are net-long with the ratio of traders long to short at 1.18 to 1. The number of traders net-long is 2.0% higher than yesterday and 4.4% lower from last week, while the number of traders net-short is 19.7% lower than yesterday and 15.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil – US Crude prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil – US Crude-bearish contrarian trading bias.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.



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