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 US dollar made fresh lows in US Dollar Index terms but has staged a mild recovery against the euro and yen and given the commodity bloc currencies a bit of a beating.
And it is this mild rally off the lows, together with the divergence among pairs away from just straight US dollar weakness across the board, which suggests to me that traders are becoming a little more discerning and circumspect with so many pairs at multi-year highs.
For now though, EUR/USD remains above 1.18, GBP/USD is atop 1.32 and USD/JPY is still in the low 110. So I might be a little early. Yet the dollar bloc performance suggests the worm could be turning for the US dollar.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
The discussion over the outlook for the US dollar is a complex one.
On the one hand the IMF said over the weekend the US dollar is somewhere between 10-20% overvalued based on US near-term economic fundamentals.
Reuters reported the fund said "the dollar's appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump's administration".
So as Europe recovers, as the existential threat to its existence recedes, and as the positive data flow - just look at last nights Q2 GDP release of 0.6% qoq and 2.1% yoy - push the ECB toward ending emergency measures is it any wonder that traders and investors have materially upgraded their outlook for the EUR/USD.
So naturally the euro has rallied. The question is whether the recent rally of 7-8 big figures over the past 6 weeks has captured enough of that change in outlook, and accelerated vertically at such a rate that a pullback is now warranted to consolidate this move.
My sense is yes.
But then again last night's data in the US saw the Citibank Economic Surprise Index dip back to -44.8. So any pullback right here and now is technical in nature.
On that front I'm still waiting for a signal to even place a sell order in EUR/USD let alone waiting to get triggered short. So the preconditions of a pullback have started to form.
Anyway, here's the chart - last night's high was below the previous night's zenith. So the preconditions of a pullback have started to form.
On other pairs sterling is doing relatively best after UK manufacturing PMI bounced back with a print of 55.1 beat economists guesstimates of a 54.4 print. This is not weak by any stretch of the imagination and will add to the debate at the Bank of England this week when it sits down to discuss interest rates. It suggests to me there is a chance of a EUR/GBP rotation.
Looking at the chart of GBP/USD the saw-tooth pattern of this rally still seems to me to be the most likely continuation for the pound. But like the euro I don't have a signal to sell GBP/USD back toward that trend line yet. So I wait - and stand aside for the moment.
Price action in the yen suggests the chance of a pause. There is now much focus on the future of prime minister Abe who has become embroiled in scandal recently. But, like the euro and many other pairs, this is about the US dollar right here and right now. For the moment at 110.27 USD/JPY is still biased lower on the charts but can build a base if 109.94 holds.
Looking at the commodity bloc we see some of the bigger moves in forex markets.
At 0.7957 the Aussie dollar is down around 0.7% from 7am yesterday morning and 80 odd points off the highs of yesterday around 0.8040. My system is still short Aussie and I've written my usual Aussie dollar specific piece this morning - you can read it here.
The Canadian dollar has lost 0.45% as USD/CAD continued to rally and is now sitting at 1.2531. My system is long USD/CAD.
The kiwi was down 0.6% this morning at 0.7469, but it's completely fallen out of bed since the release of the employment data a little while ago.
NZD/USD is now trading at 0.7422 down another 0.6% from where it was at 7am this morning. Unemployment printed 4.8% as expected but the quarterly employment growth - or should I say fall - of -0.2% was a big miss on the +0.7% expected. That knocked the yoy number down to 3.1% from the 4.1% expected.
So the kiwi is under pressure.
You'll notice the set up looks very similar to the AUD/USD, and the inverse of USD/CAD. Price action has now taken the NZ dollar to my fast moving average (which is also the 38.2% retracement level of the rally since July 9/10) and if that breaks I'd look for a move to the trendline at 0.7347.
The Canadian dollar has lost 0.45% as USD/CAD continued to rally and is now sitting at 1.2541. My system is long USD/CAD.