Fed Chair Powell Underwrites US Dollar Strength

Originally published by AxiTrader

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day.

As ever, feedback welcome....oh and for AUD/USD specifically you can find that in My Australia Today piece.

QUICK SUMMARY

The US dollar is up half a percent this morning at 94.97.

USD/JPY has mapped that move higher to 112.92 while the euro lost 0.5% to be at 1.1656. That the euro’s weakness didn’t get a bigger nudge from dovish comments from Oli Rehn is interesting. GBP/USD has been caught up in the maelstrom of Brexit shenanigans (PM May even tried to send the Commons into recess and summer holidays early), Mark Carney saying a Hard Brexit would impact rates, good employment but no wages growth, and of course the US dollar's move – it’s at 1.3112, down 0.9% giving up substantial early gains.

Indeed the US dollar had been under pressure before Powell’s testimony to Congress where he reaffirmed the US economy is strong and rates are still heading higher.

The early US dollar weakness saw the Aussie peak at 0.7438. But it’s back at 0.7381– on ST support – for a loss of 0.5%. The kiwi was also sharply higher at one point yesterday after the RBNZ’s preferred inflation gauge accelerated to the lofty height of 1.7%. A 7 year high which drove NZD/USD back to resistance with a high at 0.6840. It’s at 0.6773 now, roughly flat day on day. The Canadian dollar lost 0.4% and is at 1.3186 – still respecting that trendline.

And the yuan continues to weaken. It's closing in on the recent highs once again at 6.7245 in USD/CNH terms and 6.7018 in USD/CNY terms.

BIGGER PICTURE

If you want to read more of my analysis on Jerome Powell's address and what it means please see Markets Morning from earlier.

Policy and economic divergence are a thing folks.

I know that I have been banging on about this for months and months but it remains the key to the outlook for forex markets – along with technicals and positioning that is.

What Powell did last night when you juxtapose it with the concerns that Bundesbank President Weidmann expressed about the German economic outlook and Oli Rehn’s caution over the ECB locking itself into a premature path is a clear signal that the US is at a very different point in the cycle to Europe, Japan, and increasingly China. Of course, it’s also at a different point in the cycle to almost anywhere given the fiscal stimulus and self-sustaining momentum the US economy seems to have right now.

Chart

That’s not to say that the improvement in other jurisdictions economic data isn’t important.

The moves in the CESI scores for the US and other nations and areas is a primary input into my analysis framework as readers know. So, as I’ve been highlighting in recent notes the recovery in data from the UK, Japan, EM, Canada, and the EU has been an important sentiment changer in forex markets. That hasn’t changed and many analysts still see this trend as a handbrake on the US dollar's rally. I agree. But only until the recent lows give way. Then the technical will again predominate.

Because if the euro’s inability to drive higher, if USD/JPY’s inability to worry over market ructions, and if the continued selling every time the Aussie or Canadian dollar rallies recently tells us anything it is that structurally the US dollar seems to have the upper hand.

But it hasn’t broken out yet except against the Yen. Is that the precursor to a push through 1.15 in EUR/USD terms or 73 cents for the Aussie and so on? It could be. But for the moment we are in a range and perhaps this next week or so will continue to respect that until we get the next data dump in early August. Then forex traders, like Fed chair Powell, will be data dependent.

Forex Chart of the Day is GBP/USD. Sterling is caught in a maelstrom as I highlighted in the introduction. Conventional wisdom is still that a soft Brexit eventuates and that is keeping Sterling bid. But rumours are rife the EU is readying for a hard Brexit – at least on Twitter. That, plus the trouble with the May government, Mark Carney saying a Hard Brexit would impact rates, and the US dollar's move have all knocked GBP/USD back to the bottom of the range. 1.3045/50 is the key now. A break could suggest a move under 1.29.

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DATA:

It’s a quiet day in Asia for data with the Westpac Leading index for Australia the only release of note. Tonight though UK inflation data – RPI, PPI, and CPI – are out along with Euro area CPI. They could move the needle on forex rates. Tonight Powell is back on Capitol Hill giving his second round of testimony and we also get housing starts and building approvals along with the Beige Book. That might be interesting at 4am tomorrow morning.

Have a great day's trading.