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
Brexit talks began between the EU and Britain overnight but it was comments by New York Fed president Bill Dudley which was the highlight of the night on forex markets.
That buoyed the US dollar and put the euro, yen, and pound under pressure. The Aussie, Canadian, and kiwi dollars, in contrast, are hanging relatively tough all things considered.
With little data in the next 24 hours, it's speeches by the Fed's Evans and Fischer along with one by BoE governor Carney which will be the key events for forex traders to watch.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
Bill Dudley’s comments, and a lack of weak data, helped the US dollar rally overnight.
In US Dollar Index terms it’s up at 97.52 which is at the bottom of the resistance zone I've been highlighting recently. This US dollar needs to churn through this zone - between 97.50 and 97.80 - before it can make a run at overhead resistance at 98.50.
I'll get to the comments by NY Fed's Bill Dudley and Chicago Fed president Evans a little later because the technicals are turning for the dollar and a break of 97.80 is the first step on the ladder higher.
You'll see the corollary in the Euro outlook as it rests on support below. But before that I want to talk about policy divergence and currency markets.
Yesterday I highlighted that even though the Fed had set itself apart from the ECB and BoJ the dollar was struggling because the data has been so weak relative to expectations recently in the US.
That weakness remains a handbrake if for no other reason than the market doesn't believe the fed with the Citibank Economic Surprise index down here at -77.5 at the moment.
But the Fed, and myself, clearly believes that will change in the future.
I've reported Dudley comments in my Morning Markets Wrap and what's key to know is Dudley believes the economy is doing well and that tight employment markets will see wages and inflation start to rise soon. He also believes this very long US expansion isn't going to die of old age anytime soon.
His colleague from the Chicago Fed, president Charles Evans, was also upbeat in a speech delivered a little while ago. Evans said "To be sure, gross domestic product (GDP) growth was weak in the first quarter. But that seems to have been transitory, and the data in hand point to a strong rebound in the second quarter".
When the data turns - assuming the Fed is correct - watch the US dollar fly.
Looking at the euro, and the corollary of the dollar’s strength is a fall of 0.50% to 1.1142. Some commentary says that both Euro and GBP are weaker as the Brexit talks start. That may be true, but my sense is only at the margin. This is about central bank policy divergence and economic outlook. As I say above when the data eventually turns in the US we are going to see a very strong reaction in forex markets. ANd nowhere is that likely to be more acutely felt than in the euro and yen with their respective central banks retaining a dovish bias right now.
But the data has to turn first. So in the meantime charts are my guide and on that front EUR/USD is testing support right here and now. But the 1.1100/10 (the red line) is the level I’m watching closely. My system is short and I'm targeting a move to 1.1060 and then 1.1010/20. If this level gives way it's back toward the french election gap in the low 1.08's that I'd be looking toward.
The CBI has this morning just upgraded the outlook for the UK economy for 2017 and 2018 by 0.3% to 1.6% and 1.4% respectively. But GBP remains offered a little at 1.2729. In truth it's still mid range as traders await
In truth, it's still mid range as traders await a speech from Bank of England governor Mark Carney during the UK morning. But if I had to posit he might say the economy does face inflation challenges but these are likely to be outweighed by economic headwinds at the moment.
At 0.25% BoE rates feel too low to me. But Carney is likely to want to preserve low rates and maintain stimulus for as long as possible while the political and Brexit uncertainty persists. Central bankers know how to rein in inflation - or heaven forbid - rampant growth. Those are issues for another time.
Looking at the GBP/USD chart the 4-hours suggest a break of 1.2720 could open up a run toward 1.2680/90 on the day. With a break of that level opening up a run toward last week's triple low in the 1.2635/45 region.
MArk Carney is the key to this range holding or breaking over the next 24 hours.
Looking at the yen and it's here where we see the US dollar opening up a move toward overhead resistance with little reason for yen buyers to reenter the fray just yet. I say that because even with the US shooting down a Syrian plane yesterday, the Iranians launching missile attacks in Syria, and Brexit negotiations beginning global geopolitics remains calm.
Through in a hawkish Fed, a dovish Bank of Japan, rallying stocks and risk appetite and we have the preconditions for yen weakness.
112.24 seems the most likely next target for USD/JPY with trendline resistance from the down channel at 112.93 today.
The Canadian dollar is stalling as crude slips again – and USD/CAD is setting up as one of my favourite trade opportunities right now. USD/CAD is at 1.3226 this morning.
I still haven't received a buy confirmation from my system yet - looks like I'm still a day away. But a break of 1.3255/65 would be a sign that the move is afoot.
Bringing it back home the result of the resurgence in the US dollar is a AUD/USD rate back at 0.7592. The overnight high of 0.7629 is again near, but below last week’s peak which reinforces the 0.7635/40 region as the range top. For the Aussie, it’s going to be about the US dollar mostly, but the RBA minutes (assuming they are upbeat) should help it on the day.
Have a great day's trading.