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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)

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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

EUR/GBP May Rise if Brexit Hopes Continue to Fade

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British Pound Outlook, Brexit, GBP/USD Technical Analysis – Talking Points

  • British Pound may reverse recent gains if Brexit perils undermine confidence
  • UK members of Parliament will be voting on Boris Johnson’s new Brexit plan
  • Will DUP derail Johnson’s plan, and if so, will there be yet another extension?

Learn how to use political-risk analysis in your trading strategy!

The Euro may edge higher against the British Pound if hopes for an orderly Brexit continue to dissolve. On October 17, UK Prime Minister Boris Johnson and European Commission President Jean-Claude Junker jointly announced that a Brexit deal had been reached. Sterling rallied on the news, though its upside movement was curtailed by news that the Irish Democratic Unionist Party (DUP) would not support his plan.

Securing their support is essential if Mr. Johnson wants to pass a deal through the House of Commons. If he fails to do so, it could severely derail plans for an orderly Brexit which would likely see the British Pound reverse a significant portion of its recent gains. However, EU Council President Donald Tusk has not ruled out the possibility of an extension if lawmakers failed to agree on a deal on Saturday.

In Parliament there are currently 287 voting conservative lawmakers which Mr. Johnson will need if his proposal is to survive. He may also have to lean on over 20 former Tory MEPs who switched over to become independents. However, that may not be enough votes which may compel the PM to ask for help across the political aisle.

Market Analysis of the Day: Will the British Pound Reverse its Recent Gains?

Chart showing EUR/GBP

GBP Index chart created using TradingView

FX TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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Australian Dollar Firm After China GDP Miss But Trend Aims Lower

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CHINA, GDP, TRADE WAR, AUSTRALIAN DOLLAR – TALKING POINTS:

  • 3Q Chinese GDP registers narrowly worse than expected at 6.0% y/y
  • Industrial production data, US trade talks may have offset the headline
  • Australian Dollar little-changed but overall trend still pointing lower

Where will markets end 2019? See our Q4 forecasts for currencies, commodities and stock indexes!

The Australian Dollar found little of interest in mildly disappointing Chinese GDP data. The figures put the on-year growth rate at 6 percent, a hair lower than the 6.1 percent expected by economists. Nevertheless, this marks the slowest pace of expansion in at least 27 years.

Upbeat industrial production readings might have helped offset a soggy headline figure. The rate of on-year growth unexpectedly jumped to a three-month high of 5.8 percent. Early signs of stabilization in retail sales figures may have helped as well.

The report’s limited implications for larger macro themes dominating investors’ attention may likewise explain the tepid response. Extrapolating a view on future Chinese growth seems nearly impossible without greater clarity on trade negotiations with the US, making today’s release appear somewhat moot.

Australian Dollar vs US Dollar price chart - 1 minute

1-minute AUD/USD chart created with TradingView

Assessing the broader landscape, choppy AUD/USD consolidation since early August leaves firmly intact a well-defined downtrend established from late December 2018. Prevailing monetary policy trends suggest it is likely to continue, with longer-term charts setting the stage for deep losses in the months ahead.

Australian Dollar Firm After China GDP Miss But Trend Aims Lower

Daily AUD/USD chart created with TradingView

AUD/USD TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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USD/JPY Rate Faces Bearish Reversal Pattern Amid Brexit Deal Hopes

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Asia Pacific Market Open Talking Points

Find out what the #1 mistake that traders make is and how you can fix it!

AUD/USD, NZD/USD Climb as Japanese Yen and US Dollar Sink

The sentiment-linked Australian Dollar and similarly-behaving New Zealand Dollar soared against their major counterparts on Thursday. This was at the expense of the anti-risk Japanese Yen and haven-linked US Dollar. A rosy mood in stock markets, fueled by hopes of a Brexit deal, could have been the source of optimism from investors as the S&P 500 closed 0.28 percent to the upside.

During European trading hours, European Commission President Jean-Claude Juncker and UK Prime Minister Boris Johnson announced that a Brexit deal has been reached. However, optimism receded after officials from the Democratic Unionist Party (DUP) saying that they would not support Johnson’s agreement. Their support is crucial for Mr Johnson to pass his deal in Parliament perhaps on Saturday.

Still, the British Pound and Euro aimed nervously higher despite giving up some losses. Disappointing economic data out of the United States also likely fueled their gains against the US Dollar. Local industrial production unexpectedly declined 0.4 percent m/m in September versus -0.2% anticipated. US front-end government bond yields traded lower as markets kept their hopes up for further Fed easing.

Friday’s Asia Pacific Trading Session

Ahead, the Australian Dollar will be closely watching incoming third quarter Chinese GDP data after rosy local jobs data offered AUD/USD a boost. Data out of China has been tending to underperform relative to economists’ expectations, opening the door to a continuation of the trend. As a China-liquid proxy, the Aussie could reverse recent gains should weakness in growth from a close trading partner spread slowdown fears.

Join me later today at 1:45 GMT for LIVE coverage of China GDP where I will be going over the reaction in the Australian Dollar!

Meanwhile, the Japanese Yen will likely look past a set of local CPI data due to its limited implications for near-term BoJ policy action. Rather, it may focus more on China GDP and the mood in regional stock exchanges. S&P 500 futures are little changed with a slight downside bias heading into Friday’s APAC session. A bittersweet mood from investors may boost the Yen.

Japanese Yen Technical Analysis

The USD/JPY could be in the process of carving out a rising wedge candlestick formation. This is typically a reversal pattern and if so, may down the road open the door to downtrend resumption – as outlined in my Q4 USD/JPY forecast. As such, the latest test of the ceiling of the Rising Wedge may pave the way for a test of the floor which goes back to the end of August – red area on the chart below.

Chart of the Day – USD/JPY

USD/JPY Rate Faces Bearish Reversal Pattern Amid Brexit Deal Hopes

Chart Created Using TradingView

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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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