A US Dollar Fightback Is The Story Of The Night

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 weakness in US durable goods and Chicago National Activity Index was a pretty good reason for the US dollar to fall last night. The data disappointed but the dollar found a bid and recovered to end unchanged.

Is that just the northern hemisphere summer induced doldrums or is it something more. It is too early to tell because one day of ignoring data - like one swallow - does not a summer make.

But it is interesting.

Overall many pairs are largely unchanged day-on-day as a result of the US dollar's fightback. But that doesn't mean nothing happened, Indeed USD/JPY has broken out. Is this move the precursor to a broader US dollar rally? That's the big question.

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

I'm going to repeat some of what I wrote in my Morning Market Wrap today because I think it's important.

Riddle me this.

US data is awful - durable goods miss (-1.1% v 0.6% expected) and the Chicago activity index (-0.26 against +0.57% last) suggests growth below average - yet the US dollar fights back across the board to be flat to slightly better bid against most pairs.

My hypothesis would be that central bank outlooks matter and Bill Dudley and John Williams' comments over the past 24 hours juxtaposed with those from Mario Draghi highlight the Fed is still going to tighten and undertake negative QE, while the ECB sits pat.

I just want to unpack that a little with a particular emphasis on Dudley.

Draghi said Europe still needs accommodative policy while San Francisco Fed's Williams said inflation is still on track to hit 2% in 2018 and more rate rises are on the way. But for me what's important for currency markets is that Dudley expanded the Fed's mandate in a way that suggests he sees the fed with a broader remit than just inflation and unemployment.

Dudley said, “when financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation” . That means broader financial conditions should be taken into account when the Fed is setting policy rates.

And that means more rate rises and negative QE in the US via the run down of the balance sheet.

But while policy divergence is a clear theme forex traders should keep in mind the awful US data flow remains a handbrake on the dollar.

I'm fond of using the Citibank Economic Surprise Index as a proxy for data flow and it's worth noting that it dipped to 78.5 last night - 0.1 above recent 6-year lows. Now if only the data in the US would turn to back the Fed's more upbeat than market expectations up we could see a massive dollar rally.

I’m still watching 97.80 and then 98.50 in DXY terms – it’s at 97.43 this morning, up 0.17%.

Euro is currently at 1.1180 barely changed but I see a currency stuck between resistance at 1.13 and support at 1.11. Monday is a down candle and the inability to hold above 1.1220 suggests another test toward the recent lows.

On the 4-hour charts, I see support at 1.1160/65 with resistance at 1.1220.

Here's the daily chart:

Chart

USD/JPY is up a little more than half a percent this morning at 111.87.That’s a new high for this run which suggest this pair has got the legs to run higher and possibly lead the US dollar out of the doldrums.

The next level to watch is the 61.8% retracement of the May-June fall from the downtrend top. That level is 112.24 with the actual downtrend line coming in at 112.75 at the moment. Short term support - based on the 4-hours - is 111.65/70 and then 111.17.

Here's the daily chart:

Chart

GBP/USD was a little higher after the Conservative/DUP deal was announced but at 1.2719 it is mildly weaker but largely unchanged this morning.

As you can see in the daily chart below GBP/USD had a pretty awful candle. It ran into resistance at my fast moving average with a 1.2759 high overnight before dipping back. My sense is that today's price action needs to hold above yesterday's low at 1.2705/06 otherwise the way is pointed downwards once again. Of course a move above last night's high would be similarly instructive.

The reality is we are still mid-range of the recent moves - BoE governor Carney's speech tonight will be a big event for the interest rate outlook and by extension the pound.

Here's the daily chart:

Chart

Looking at commodity bloc currencies and the kiwi is largely unchanged at 0.7280 as it hits resistance and I think is finding the air a little thin at these levels.

There are very, very, tentative signs that the 0.7310/20 region I talked about on yesterday's video as resistance might prove toppish right now. A break of 0.7250/60 would be the first sign that a reversal is near.

BREAKING: Just as I'm about to hit send the kiwi trade surplus is out with a miss to the downside. The trade balance for May came in at 103m New Zealand dollar versus the expected surplus 419m. NZD/USD at 0.7274 now.

Here's the daily chart:

Chart

The Aussie ran toward 76 cents again overnight making a high around 0.7598. It’s back at 0.7580 up 0.2% day on day. It’s hanging tough all things considered.

The Canadian dollar was stronger with oil overnight but a lot of that has washed away with the USD/CAD back at 1.3252 down just 0.1%.

My system remains long with the 1.3190/1.3200 region the key to the outlook. It's clear here that the US dollar has support and that a base is forming. But if this level gives way 1.3160/65 opens up below here it's back toward 1.30.

Resistance on the dailies remains the 200 day moving average at 1.3340. We've now had two inside days in a row which tells me the market remains uncertain.

Here's the daily chart:

Chart

Elsewhere EM oil currencies are starting to catch a bid. As well they should.

Have a great day's trading.