Is That It For The US Dollar?

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 my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.

RECAP

We saw what looked a lot like key reversals in many currencies to end the week on Friday. That suggests the easy money has been made for this first leg of the US dollar's recovery.

You can see in the way I frame that I still think the US dollar has further to run in time. That's because the data flow should continue to improve while European data and the ECB are less likely to be supportive of the euro than is currently factored.

But in the near term, the price action tells us that traders are becoming more hesitant now that the initial US dollar recovery and reaction to the North Korean tensions has played out.

Now we'll advance, or withdraw, with each new piece of news, data point, and shifts in sentiment. And of course, don't underestimate the impact stock movements can have on forex now volatility might be picking up.

HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS

The US dollar lost ground Friday. Whether it’s the euro back above 1.1820 this morning, the Australian dollar breaking the August downtrend and trading back near 79 cents, a key reversal day for GBP/USD and USD/CAD, the signs are that the easy money in this US dollar recovery is – or has been – made.

As I've noted in the recap naturally how the rhetoric, tensions, and heaven forbid action, flow in around North Korea will remain a key and critical factor for forex traders this week. But there is some chance that maybe EU inflation could remind traders the ECB is not yet likely to materially change course? But then again the market remains more convinced than me that the ECB will announce changed policy for 2018 at its September meeting. We’ll see.

But after the weaker than expected US CPI print Friday, which saw headline prices in July rise just 0.1% - markets had been expecting a 0.2% print and 1.8% year on year not the 1.7% which was released - the US dollar slipped. Core inflation at 1.7% was as expected. But both rates are still under shooting the Fed’s 2% target and even though there are plenty of one off factors to help explain the dip an undershoot is an undershoot meaning the Fed is likely to stay its hand a little longer, traders are betting. So US 10's closed the week at 2.187% - the lowest close since late June. And euro is back above 1.18.

It's the third day of rallying after EUR/USD hit the 38.2% retracement level perfectly. I'd have to see a new high though to convince me a deeper retracement isn't still in the offing. It's worth noting though a break would suggest 1.20/1.21.

Chart

In the short term though we’ve seen the emergence of a reversal in US dollar strength across the board.

Yet the fact that we also saw the range hold in USD/JPY suggests the initial moves in currency markets in relation to the heightened tension on the Korean peninsula have been made and traders are waiting for the next shoe to drop.

I also find it interesting that even though USD/CHF was lower Friday it did bounce from the lows. That suggests, along with all the other moves we are seeing right now in forex markets that this is not a singular narrative about the US dollar overall. The other side of the cross is important.

It’s why the Aussie has retained support, why the euro is doing well – across the board – and why the yen is strong but yet to break the range.

Here’s the USD/JPY chart - I’m watching this range closely.

Chart

I've done my usual AUD/USD piece. I've paid particular attention to the RBA minutes, China data today, and the increase in volatility we are seeing. It's possible the long downward trend in stock market volatility - or at least the price of same via the CBOE Volatility Index - has turned.

Elsewhere in the commodity bloc it is clear the kiwi has support around 0.7250 with 0.7330/45 the top of the current down trend. The 4-hour charts suggest a test toward that level and then we'll see.

Here's the NZD/USD 4-hour chart.

Chart

USD/CAD put in a big reversal day with a higher high and lower low. 1.2585.1.2625 are key supports short term while 1.2750/70 remains important overhead resistance.

Have a great day's trading.