ECB Disquiet Over Euro

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

The uncertainty continues for the US dollar - but it's becoming nuanced, and specific. '

Last night the dollar gained against the euro after the ECB minutes reflect a disquiet - and possible impact on policy changes - from the strength of the EUR/USD and the markets potential to misinterpret any ECB action.

Last night the dollar also gained against the commodity bloc as base metals drifted a little and investor sentiment soured after stocks took a hit.

But last night the yen surged and the Swiss franc (along with gold) rallied both because of the sell off in stocks and the genesis of that selloff - a recognition that Trump's Cabinet may soon start to desert him and that pillars of Trumponomics may never be enacted.

So the US dollar is stronger in parts and weaker in others.

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

The euro is an issue for the ECB and that means it's an issue for forex traders who believe the current level reflects an expectation that the ECB will materially change policy to support current valuations even though – as I pointed out in my forex today column earlier this week – German bond rates do not.

Here's the latest version of that chart showing the break down in US-German bond spread as a driver of the EUR/USD - this time I've used 10's instead of 2 year spreads. It's not as dramatic - but you get the gist of the argument.

Chart

Looking at the actual EUR/USD price action though makes it clear 1.1660/80 (last night's low was around 61) is still the key to the bears castle. If it breaks we’ll see EUR/USD head lower.

Otherwise this is exactly the uncomfortable consolidation for the euro – and the US dollar more broadly – I talked about in yesterday's piece. That's as traders try to figure how the economic, central bank, and Trump influences all coalesce. And what that means for currency valuations going forward.

Here's the EUR/USD. It looks biased lower. That's what the ECB wants, that's what spreads suggest. That's where the charts seem to be pointing.

Chart

Yen traders too are making bets with USD/JPY reversing sharply from near 111 just two days ago to sit at 109.50 this morning – down 0.6% from yesterday.

Stronger Japanese data, stocks and bond rates lower, uncertainty about the presidency of Donald Trump all combine to see the yen (and the Swiss franc to a lesser extent) stronger and near the bottom of the recent range.

So far price is respecting the recent break. And USD/JPY is still inside this wide range for 2017.

Chart

Sterling is looking interesting right now. It is not far off a big breakdown against the US dollar. At 1.2870 GBP/USD is only about 30 points above the level that could signal a break down toward 1.2585 - where the latest rally started from. Against the euro I'm watching the 0.9050/60 region as support for the euro and a popssible signal that EUR/GBP is about to break down.

Naturally, there is a fair chance that such a move would support GBP/USD - all other things equal. But they are unlikely to be so we'll see.

Here's EUR/GBP - my system will sell if 0.9050 breaks:

Chart

Elsewhere the commodity bloc has reversed somewhat as commodity prices – especially industrial metals like copper in the AUD/USD's case – have also eased.

The Aussie is down 0.4% at 0.7890 and I have done my usual Australian dollar specific piece this morning. You can read it here. The 5-minute chart of AUD/USD and Shanghai copper is a thing of beauty.

The kiwi is at 0.7284 down 0.36% day on day but well below the 0.7335ish high we saw yesterday. It's outlook, its chart, is very similar to the AUD/USD at the moment.

The Canadian dollar is 0.4% weaker with USD/CAD up at 1.2680 this morning. The dollar's recovery - like so many pairs - is messy. The consolidation or reversal needs to break either side of the recent low and high to get the next leg happening.

Have a great day's trading.