The US Dollar Is Getting Hit Again As A Dovish Fed Looms On The Horizon

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

Lael Brainard is a Fed governor and a renowned monetary policy dove. So the tone of last night's speech should not have been a surprise to anyone. But Brainard made clear that she thought the Fed should hold fire on any more rate hikes and possibly run the economy a little hot until it sees the return of inflation above its 2%.

That saw the US dollar under pressure.

But it was the surprising admission from Minneapolis Fed president Neel Kashkari - himself a dove - which suggests a possible big shift in Fed thinking is under way.

Speaking early this morning Australian time Kashkari said, "maybe our rate hikes are actually doing real harm to the economy...leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations".

Uber dove alert folks.

Are Brainard and Kashkari the advance guard for a changed conversation at the Fed or is the US central bank simply having a pre-FOMC conversation in public. Clearly what the BoC and ECB do this week are important. But a changed conversation at the fed could mean the resumption of the acute US dollar weakness we saw before August's consolidation.

The result this morning is that the EUR/USD is at 1.1920, USD/JPY is threatening the bottom of the range as it sits at 108.58 looking like a break is a big risk. GBP/USD surged last night and it's at 1.3042 while the kiwi rose more than 1% and is at 0.7247 this morning. The Aussie is near 80 cents and thee Canadian dollar traded at its strongest level in years overnight - it's at 1.2366 as I write.

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

Besides the comments and from Brainard a big, 3.3%, fall in factory orders also hurt the US dollar overnight - and before Kashkari's speech. That's knocked the US Dollar Index back to 92.28 and just above last month's low around 91.50/55.

That's a critical level now. A break could see the US Dollar Index fall into a big long term gap between that level and 89.50.

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Naturally the associated move is a stronger euro which is sitting at 1.1920 this morning. That gain is around 0.2% day on day which is not spectacular and still inside the range we saw Friday night.

No doubt that’s because traders are waiting to see just how dovish, or not, the ECB is at this week’s meeting.

For the moment euro remains above the mid-Bolliinger band and my fast moving average on the daily charts suggesting support keeps coming in on dips. There is a little 4 hourly trendline which sits at 1.1980 with further support in the 1.1860/70 region short term.

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USD/JPY is back under 109 as traders worry both about North Korea and swooning stocks. At 108.60 USD/JPY is down more than 1% since 7am yesterday and now less than 40 points off last week’s lows and 50 points above the low of 2017.

I respect the range unless or until it breaks. But if 108 breaks the outlook shifts decidedly bearish for USD/JPY with a target in the 106.50 region and then 103/104.

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Sterling is higher and back above the 1.30 level I’ve been targeting lately as the key to the next leg higher. It's back through the 50% retracement of the recent downtrend now as well with the next resistance 1.3080/85 before it could run back above 1.32.

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Of the Commodity bloc the kiwi is doing best after a good dairy auction (at least that's my take). At 0.7232 the NZD/USD is up 1.01% day on day.

The Aussie too is strong and at 0.7994 it’s up 0.67% after yesterday’s solid data in Australia and positive surprise in Chinese PMI’s. Traders will be betting that the economist are right in their forecasts of a strong GDP report and were it not for the tension on the Korean peninsula right now we’d be talking about an Australian dollar at new highs for the year such is the level of support both fundamentally and from buyers.

I've written my usual AUD/USD piece which you can read here.

The Canadian dollar followed oil a little higher and is up 0.35% with USD/CAD down at 1.2367. Traders await the BoC decision and comments tonight. 1.2160 seems a reasonable interim target if the US dollar continues to weaken. But it's hard to think the BoC won't have anything to say about the recent surge.

Have a great day's trading.