Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in the broader overnight Market Wrap that I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
The US dollar is turning.
Yes the data flow has been weak, and yes that is a huge handbrake fundamentally. But many is the time that the data supports the moving technicals. Equally a hawkish Fed is dollar supportive. So when the data does turn, as it will, the US dollar could roar.
For the moment though it's just a turn.
Euro is lower, but still holding above 1.1100/1.1110. USD/JPY has stalled, the Aussie is back near support, the Canadian dollar is giving up some gains and Dollar Asia is stronger. And of course the dovish speech from BoE governor Mark Carney
And of course, the dovish speech from BoE governor Mark Carney reinforced the central bank policy divergence that has been writ large with Junes meetings at the ECB, Fed, and BoJ. The BoE caught the market by surprise with a split vote but Carney has unwound that.
How far can the US dollar go before the data turns? That's the immediate question.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
Central bank speakers are again driving currency markets in the absence of important data. So it is that the combination of Dudley and Evans comments yesterday morning, and then Kaplan’s assertion overnight that US growth will be at 2% this year and that the recent weak inflation will prove “transitory” (awful word) as eventually, upward price pressures return – have helped the US dollar.
Certainly they are worried about inflation it seems. And that means the one more hike the Fed has forecast - or expects - for this year is nowhere near a lock for September. But the clear message from speakers is that the overall economy - and the labour market in particular - is doing okay.
So the Fed maps its path as another tightening and the start of balance sheet tapering in 2017.
And that has helped the US dollar which in index terms this morning is at 97.72. That's right near the top end of the range I’ve been talking about. It was above 97.80 at one point this morning but I’m comfortable to call the turn I’ve been hinting at over the past few days since the big post-Fed reversal. That’s mostly a technical call and it means that the 98.50 region I’ve also highlighted this week remains important topside resistance. It’s my target right now. Certainly, the US data flow is a handbrake on the US dollar. But central bank intentions are important and on the front, the Fed has been unequivocally hawkish.
We all know the impact that ECB dovishness had on the Euro when Mario Draghi surprised many a few weeks back. We saw that reprised last night with Bank of England governor Mark Carney's Mansion House speech.
Carney’s speech hit the pound for six. He was as dovish as he could possibly be without promising to take rates to zero. Carney made it clear that he is in no rush to raise rates in his speech at the Mansion House last night. He’s worried about the outlook for the economy more than he’s concerned at the uptick in inflation recently. Indeed in one key paragraph, he highlighted the inflation uptick is about the Pound’s fall as he laid out both his concerns and the roadmap to a re-evaluation.
“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular, anaemic wage growth, now is not yet the time to begin that adjustment. In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations,” Carney said.
So this morning GBP/USD sits at 1.2629 down 0.82%. The low overnight was 1.2603. The 1.2557/1.2578 region contains the 200 day moving average and 50% retracement level and is next support for the pound against the US dollar.
The euro is marginally lower. That's despite IFO upgrading its outlook for the German economy by 0.3% for this year to 1.8% from1.5%. In France INSEE also upgrade the growth outlook. This time by 0.5% to 1.6% which would be France's best growth rate since 2011.
Viewed in this light though you can see why this didn't exactly sit the dollar bulls on their heels. Growth is still weak.
So euro is now sliding back inside the old uptrend. But for the key level remains 1.1100/10. It’s at 1.1129 this morning after an overnight low of 1.1119. My system is short and a break of the levels I’m watching could see a big cascade lower. 200 points maybe if that's a head and shoulder I'm seeing.
USD/JPY is mixed but lower at 111.26. The 4-hour charts suggest a deeper pullback now that the uptrend has broken. That suggests a move perhaps toward the 38.2% retracement level of the recent up move which comes in at the 110.60/65 region. 111.25 looks to be the key to whether the move happens or not.
If there is one currency that shows the power of policy messages it has to be the Canadian dollar. Last week's message from BoC governor Poloz and his deputy that the time to move rates higher in Canada may be at hand has let the CAD hold a much stronger position than either the collapse of oil or the lift in the US dollar would suggest.
We are seeing a turn in USD/CAD. But it would be reasonable to have expected the recovery to have been a little stronger at this juncture. That said Canadian dollar is on the back foot with USD/CAD up around 0.4% at 1.3268.
I got my buy signal this morning and a break of 1.3285 will see me long targeting 1.3360/65 initially.
Closer to home the Aussie has fallen out of bed and it’s at 0.7571 as I write. That means its testing the bottom of the very recent range with a break below 0.7565/66 opening up a run toward 0.7515/20 which has been recent lows. A stronger US dollar, falls in iron ore and base metals, a collapse in stocks again yesterday, and concerns over the economy and banks are all weighing on the Aussie. The run above 76 cents is starting to look like it might represent an important top.
You can read my full Australian dollar column here.
Have a great day's trading.