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US Dollar Gains Limited Ahead of FOMC Minutes

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US Dollar Forecast Overview:

  • The DXY Index has made little progress in recent days, and as a result, prices have begun to coil. But as the saying goes, “consolidations today lead to breakouts tomorrow.”
  • Based on the Eurodollar contract spreads, there is exactly a 50% chance of a 25-bps rate cut by the end of the year – much less aggressive than Fed fund’s implied probability of 93%.
  • Retail trader positioning suggests that the combination ofcurrent sentiment and recent changes gives us a further mixed USDJPY trading bias.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

All eyes are on Washington, D.C. this week as American and Chinese trade negotiators meet to end the US-China trade war. While news reports have already started to lower expectations for a broad, sweeping agreement, price action across various asset classes – bonds, commodities, stocks, FX – suggest that traders are still holding out hope for an ‘olive branch’ between the world’s two largest economies.

But before any significant trade developments are revealed, market participants will need to content with Federal Reserve Chair Jerome Powell and the September FOMC meeting minutes. Comments in recent days seem to suggest that the Fed rate cycle will cut deeper than previously envisioned.

US Treasury Yield Curve Remains Ominous

Yet despite investors proving resilient in an environment proving increasingly hazardous, there are still many reasons why sentiment and rate expectations could turn on a dime. Even as US economic data has improved in recent weeks – the Citi Economic Surprise Index for the US is currently 19, up from -46.8 three months ago on July 10 – the US Treasury yield curve continues to suggest that traders are concerned about the state of global growth.

US Treasury Yield Curve: 1-month to 30-years (October 9, 2019) (Chart 1)

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It still holds that the drop in both short-end and long-end rates suggest that investors’ expectations for the Fed’s rate cut cycle have been pulled forward over the past week. Given that the US Treasury yield curve is roughly in the same shape as it was one month ago, it can be implied that markets are still pricing in similar US recession odds.

Fed Rate Cut Cycle Looking Very Dovish

There is now an 80% chance of a 25-bps interest rate cut at the October Fed meeting, according to Fed funds futures. If not, there is a 93% chance of the rate cut coming at the December Fed meeting. But if the Fed does indeed cut rates in October, then rates markets are pricing in a 53% chance of another 25-bps rate cut by the end of the year.

Federal Reserve Interest Rate Expectations (October 9, 2019) (Table 1)

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Yesterday, there was an 81% chance of a 25-bps rate cut at the October Fed meeting; one week ago, those odds were 73%; and one month ago, those odds were 61%. While the trajectory has been for a more dovish Fed, it is worth noting that one month ago, there was a 4% chance of a 50-bps rate cut at the October Fed meeting; those odds are now down to 0%.

Eurodollar Contracts Concur with Fed Funds About Cut Cycle

We can measure whether a rate cut is being priced-in using Eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Eurodollar contracts continue to be closely aligned with Fed funds regarding the scope and scale of the Fed rate cut cycle.

The chart below showcases the difference in borrowing costs – the spreads – for the continuous front month/January 20 (orange) and the continuous front month/June 20 (blue), in order to gauge where interest rates are headed in the December 2019 Fed meeting and the June 2020 Fed meeting.

Eurodollar Contract Spreads – Continuous Front Month/January 20 (Orange), Continuous Front Month/June 20 (Blue) (April 2019 to October 2019) (Chart 2)

fed rate, interest rate, fed interest rate, fed rate expectations, usd rate expectations, federal reserve rate cut odds, fed rate cut odds, fed rate hike odds

Based on the Eurodollar contract spreads, there is exactly a 50% chance of a 25-bps rate cut by the end of the year – much less aggressive than Fed fund’s implied probability of 93%. Through June 2020, Eurodollar contracts are pricing in a 72% chance of two 25-bps rate cuts; similarly, Fed funds are pricing in an 82% chance of two 25-bps by that point in time. Historically, wide gaps in rate expectations between Eurodollars and Fed funds leads to volatility in USD-pairs.

DXY PRICE INDEX TECHNICAL ANALYSIS: DAILY CHART (October 2018 to October 2019) (CHART 3)

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In our last DXY Index technical forecast update, it was noted that “further development is needed before a directional call can be made.” Unfortunately for traders, in the runup to the September FOMC meeting minutes, not much direction has been found by the US Dollar (via the DXY Index).

Last week, on October 1, the DXY Index pierced 99.37 on its way to a fresh yearly high of 99.67. But like on the first full trading days of August and September, the run to fresh yearly highs was marked by a bearish shooting star candle. To this end, the area where the DXY Index found resistance at the start of October was the trendline helping constitute resistance in the longer-term bearish rising wedge – an ominous topping pattern that persists.

For now, the DXY Index’s momentum profile remains neutral, if having a slightly bullish hue. Price is below the daily 8-EMA, but is trading above the daily 13- and 21-EMAs. Daily MACD has turned lower (albeit in bullish territory), while Slow Stochastics are hovering right around their median line. A close below the daily 21-EMA – not achieved since September 24 – may signal a greater likelihood of a turn lower.

USDJPY RATE TECHNICAL ANALYSIS: DAILY CHART (October 2018 to October 2019) (CHART 4)

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In our last USDJPY rate technical forecast update, it was noted that “a move below the weekly low at 107.45 would suggest a false breakout has transpired in USDJPY…It appears that the latter scenario – a false bullish breakout – has started to play out.” Appearances can be deceiving, and once more, USDJPY rates find themselves trading back within the consolidation.

USDJPY rates are attempting to return above the late-September swing low and 76.4% retracement of the 2018 to 2019 high/low range near 106.78/97 as well as the descending trendline from the April 24 and July 10 swing highs. The daily 8-, 13-, and 21-EMA envelope is in bearish sequential order, but USDJPY is attempting to close above the daily 21-EMA today.

Daily MACD’s turn lower in bullish territory is waning prior to dipping below the signal line, while Slow Stochastics have rebounded before falling intooversold territory. Like the broader DXY Index, USDJPY rates need more development before a directional bias can be ascertained.

IG Client Sentiment Index: USDJPY RATE Forecast (October 9, 2019) (Chart 5)

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USDJPY: Retail trader data shows 56.1% of traders are net-long with the ratio of traders long to short at 1.28 to 1. In fact, traders have remained net-long since October 1 when USDJPY traded near 107.171; price has moved 0.2% higher since then. The number of traders net-long is 5.5% lower than yesterday and 6.3% higher from last week, while the number of traders net-short is 4.7% higher than yesterday and 10.9% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDJPY 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 Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides



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Forex

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

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Canadian Dollar Talking Points

USD/CAD holds near the monthly low (1.3468) as the Bank of Canada (BoC) keeps the benchmark interest rate at the “effective lower bound of ¼ percent” in June, but the update to Canada’s Employment report may influence the exchange rate as the economy is expected to shed 500K jobs in May.

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

USD/CAD extends the series of lower highs and lows from the start of the month as the BoC announces that the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Image of BoC interest rate

The decision suggests the BoC led by Tiff Macklem will scale back the dovish forward guidance as the central bank emphasizes that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

Image of DailyFX economic calendar for Canada

It remains to be seen if the update to Canada’s Employment report will influence the monetary policy outlook as the economy is expected to shed 500K jobs in May, while the jobless rate is projected to hit 15%, which would mark the highest reading since the data series began in 1976.

The ongoing deterioration in the labor market may put pressure on the BoC to further support the economy as “the level of real GDP in the second quarter will likely show a further decline of 10-20 percent,” but Governor Macklem and Co. may carry out a wait-and-see approach over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the central bank may alter the forward guidance at the next meeting on July 15 as the “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown.”

With that said, the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April.

The Relative Strength Index (RSI) highlights a similar dynamic as the indicator tracks the downward trend from May, but the bearish momentum may abate over the coming days as the oscillator struggles to push into oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • Will keep a close eye on the RSI as it flirts with oversold territory, but the bearish momentum may abate over the coming days if the oscillator fails to hold below 30.
  • Need a break/close below the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).

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— Written by David Song, Currency Strategist

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What is Fueling the Rally?

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Dow Jones, Nasdaq 100, S&P 500 Price Outlook:

  • The S&P 500 reclaimed the psychologically significant 3,000 mark last week
  • Meanwhile, the Nasdaq 100 continues to edge closer to the all-time highs it saw in February
  • The Dow Jones remains a laggard but has posted gains of its own in recent weeks

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

The Dow Jones, Nasdaq and S&P 500 have continued to melt higher in recent days even as bullish catalysts seem to sputter out. Following the initial crash in February and early March, gains were quickly established in what many believed to be a “bear market rally” as governments and central banks offered aid in many shapes and sizes.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (February – June)

Nasdaq 100 price chart

In the weeks that followed, market pundits attributed the continuation rally to slowing coronavirus cases and the efficacy of quarantine procedures. Now the three equity indices are approaching prior levels, but more than 40 million Americans are unemployed, bankruptcies have been declared, supply chains have been disrupted and other fundamental concerns have been ignited. Still, the Dow Jones, Nasdaq and S&P climb. So what exactly is fueling this recovery rally?

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Well, to be sure, not every market move has to have a single and easily identifiable catalyst. Similarly, markets can stay irrational for extended periods of time, so gains can be built even when the underlying fundamental landscape may suggest otherwise. This phenomenon could be seen, at least to some degree, in late January and early February when it was becoming more apparent the coronavirus would become a global ordeal.

S&P 500, Crude Oil and Copper Daily Price Chart (August 2019 – January 2020)

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

Chart created with TradingView. Taken from Twitter.

While other equity markets, risk-sensitive currencies and commodities like crude oil plummeted, the three US indices trudged higher still. At the time, I noted the relationship between crude oil and the S&P 500, highlighting the infrequency of such a divergence.

At present, the catalysts for a continuation rally beyond all-time highs seem few and far between. Further still, domestic unrest will likely dent coronavirus recovery efforts and US-China tensions have soared. When taken together, it seems unlikely the Dow Jones, Nasdaq and S&P 500 will reach new heights, but other risk sensitive assets like the Australian, Canadian and New Zealand Dollars have rallied, exhibiting widespread risk appetite.

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Thus, it can be argued US equity prices have become detached from their underlying fundamentals, but shorter-term trading involves price, not necessarily economic principles, and weeks of gains would suggest the current trend is higher still, however unfounded it may seem.

While I am of the opinion that some of these gains will have to be forfeited eventually, attempting to call the top at each leg higher is presumptuous. With that in mind, it may be prudent to wait on the sidelines until a catalyst can spark selling that is met with conviction if you possess a bearish bias, because it seems that none of the current threats have sparked such a move yet. In the meantime, follow @PeterHanksFX on Twitter for updates and keep close tabs on the price action in the days to come.

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–Written by Peter Hanks, Analyst for DailyFX.com

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Index Surges Through Price Gap, Can it Continue?

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FTSE 100 Price Outlook:

FTSE 100 Forecast: Index Surges Through Price Gap, Can it Continue?

The FTSE 100 surged to its highest level since early June on Wednesday after the equity index pierced a longstanding technical barrier around 6,200. The zone marked confluent Fibonacci levels and had worked to stall bullish attempts higher in the past, notably coinciding with the swing-high in late April. All in all, the ascending channel with which the FTSE 100 trades remains intact and passing through resistance allowed for bulls to capitalize on open air above.

FTSE 100 Price Chart: 4 – Hour Time Frame (March – June)

FTSE 100 price chart

With a price gap ranging from roughly 6,200 to 6,400, the bullish break above resistance at 6,200 opened the door to a quick continuation – due to the nature of price gaps – and the FTSE must now negotiate secondary resistance around 6,400. 6,400 aligns not only with the top of the gap, but also another Fibonacci level. With that said, the spot is likely to influence price, at least to some degree, in the days ahead.

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If sentiment shifts and risk appetite diminishes, the FTSE 100 may retreat from resistance at 6,400 and fall back into the 6,400 to 6,200 range. Since the gap was filled, price movement should be met with more resistance – regardless of direction. Either way, the FTSE 100 should now enjoy support from prior resistance at 6,200, and due to the level’s influence in the past, it may prove to be a vital staging ground for bullish attempts down the road.

FTSE 100
BEARISH

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 7% -1% 3%
Weekly 14% -5% 3%

With the ascending channel intact and a series of higher-highs and higher-lows, FTSE 100 price action suggests further strength may be on the horizon. Coupled with IG Client Sentiment Data which reveals retail clients are net-short, it seems as though the shorter-term trend is leaning toward a continuation higher.

That being said, I have my reservations about current stock market activity and suspect the risk-reward relationship for many indices is currently skewed to the downside – a topic discussed at length in my webinar. Nevertheless, price is unemotional and unfeeling and recent price action is hardly a harbinger of bearish reversals so price may continue higher in the shorter-term regardless of the underlying fundamentals. In the meantime, follow @PeterHanksFX on Twitter for updates.

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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