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 stepped back from the precipice Friday as traders respected important levels in a whole host of US dollar pairs.
That's not to say the dollar is out of the woods by any stretch of the imagination. But what it does reflect is that traders are wary of the data flow this week from the US and the possibility it may print better than the recently very poor outcomes. It also reflects that data from Europe might not live up to expectations.
And naturally levels are levels. So like many traders respect them unless, or until they break.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
So we start a big week for currency traders. The easy gains have been made against the US dollar. The path of least resistance has been walked. Now for the data.
Let's begin.
The US dollar remains under pressure as we enter a big week of data which could either see the start of a reversal or the continuation of the dollar’s recent weakness. While traders have clearly given credence to the hawkish tone of global central bankers lately the Fed has not received the same reaction. That is because US data has been so much weaker than expected for the best part of two months now. At the same time data in other regions, the EU, EM, China, Australia have been on the positive side of that ledger.
The Citibank economic surprise index for the US is only just above the 6-year low. That's weak. And the data needs to turn to give traders some confidence that the Fed is right about the outlook for growth. Bond rates rising, and the steepening of the US 2-10 bond curves by about 12 points in the last week suggest they might be.
But the data needs to print less badly as a start, and then start to beat expectations.
There is little doubt that the primary driver of dollar weakness has been weak data. But it's not just US data that matters. The first two weeks of the month are always the big data flow period for the globe as well. So we’ll see how data tracks in these other jurisdictions. I’d also expect the ECB to do it’s best to try to unwind some of the euro's strength with comments and sources in the next couple of weeks.
Turning to the euro, and we see it is at 1.1420 this morning is showing some signs of fatigue. It is overextended on the charts and has so far respected overhead resistance. It’s time for a pullback toward 1.1340 to wash away some of the "overboughtness" on the 4 hour charts.
Naturally 1.13, previous resistance is the big level to watch should the downside be tested. 1.1445/70 is overhead resistance.
Here’s the chart:
GBP is back above 1.30 and closing in on the big resistance level at 1.3050/60. It would be a big thing for GBP/USD to break 1.3050/60. It would require either significantly better UK data (currently with a negative Citibank eco surprise index score of -15.8) or the US dollar to break wide open for GBP to best this level.
1.3050 represents the recent high, and high for 2017. It is also the 38.2% retracement level of the Brexit selloff from the 1.50 high on the day of the vote until October's flash crash low.
If that level was to break then thee next target would be a run toward 1.3405/1.3430 which is both the 138.2% projection of the years highs and the 50% level of the Brexit sell off.
Support is at 1.2950 and then 1.2860 - my favoured target - which is the 38.2% retracement of the recent up move. Here's the daily chart:
The Canadian dollar is still strong and celebrated the 150th anniversary of the nation by trading down and a little through the 1.2960 support region I’ve been watching. Oil’s price rise doesn’t hurt, neither does the continued relative - I highlight relative - strength in Canadian data and the hawkishness that's breed at the BoC.
What's important about this hawkishness is not that it's a signal to sharply higher rates or a large and protracted tightening cycle. Rather governor Poloz and his colleagues at the BoC are on the same page with the rest of the global central bank fraternity.
That is, the time for emergency settings have ended and policy needs to be normalised.
THIS IS IMPORTANT FOLKS. This is lens through which actions should be judged. Rate hikes, the end to QE or other policy actions are always data dependant. But the frame of reference should not be the immediate data flow but where would rates have been set in the post war period under current economic, even inflation, outcomes.
In almost all cased they would be higher. And that is where central banks are signalling rates are headed.
Anyway, back to USD/CAD. It's broken down and through 12 month range lows, it's taken out a trend line from late 2014. On the weeklies it looks to have further downside. But on the dailies it looks to be a little overcooked.
I have no signal to buy USD/AUD at present. But I'll be looking to see if it can hold above 1.29oo/10 to build a base. It’s at 1.2977 this morning. Here's the chart:
Rounding out the currencies that traded stronger and then reversed Friday, the Aussie is sitting at 0.7674 this morning after trading up to trendline resistance above 77 cents in the wake of the stronger than anticipated Chinese PMI’s Friday. The coincidence of all these levels in all these currencies tells us this is as much about the US dollar as anything else. But if the AUD/USD data flow prints positively this week it could do well on the crosses.
Here's today's AUD/USD specific column.
Last but not least for today is the USD/JPY rate at 112.25. It's sitting right underneath important resistance from the medium term downtrend price has been in since 118+ at the beginning of this year.
112.92, last week's high, remains resistance with support in the 111.45/75 region.
I haven't said much about the LDP performing badly in the weekend Tokyo election because while it undermines the prime minister at present it doesn't change the path of the BoJ or the economy - which has picked up. But it is worth noting a spied a tweet from the team over at ForexLive which said an Abe advisers suggested the BoJ needs new leadership because Kuroda is out of ideas.
Keep an eye on that.
Anyway, here's the daily USD/JPY chart:
Have a great day's trading.