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 is trying to rally. Or, more correctly, it is trying to build a base from which to rally.
But the price action, with euro still above 1.19, tells us that traders are still disinclined to take the Fed at its word on rate normalisation and what that likely means for longer bonds, spreads, and in time the US dollar.
That influential San Francisco Fed president Williams on Friday said rates will probably rise once more this year, three times next year and settle around a "new normal of 2.5%" on Friday without any material US dollar strength speaks volumes for the bearish state of sentiment toward the US dollar.
But this assertion, the dot plots, balance sheet taper and perhaps the German election might be the seeds from which the US dollar's rally blossoms.
I say that because while Merkel has been returned as the major German party the big fall in the vote for her CDU and former coalition partner the SPD the rise of the far-right AfD party with 12.9% of the vote makes this in some ways a Pyrrhic victory. For her, and for Europe.
Does it matter for Germany of Europe if AfD is the third biggest party in the Bundestag and the first such party inside that chamber since the 1940's? In many ways the answer is no, while Mrs Merkel retains power.
We'll know what traders think while euro is above, or breaks, 1.1820.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
While I've focused on the German election this morning there was also an escalation in rhetoric between the US and North Korea over the weekend. I have covered that in relative depth already in my overnight Markets Wrap which you can read here.
The key takeaway for me are comments from Russian foreign minister Sergei Lavrov, who thinks war won't happen. On Friday he likened the spat to a “kindergarten fight” between children. But on Sunday he said the US won’t attack North Korea because the DPRK has nuclear weapons. “The Americans won't carry out a strike on (North) Korea because it's not that they suspect, they know for sure that it has nuclear bombs," Lavrov said.
The ebb in gold and the yen from their peaks against the US dollar tells us that traders hold a similar view to Lavrov.
Let's get specific with some charts.
Euro ran up to just above 1.20 Friday. But it’s at 1.1918 as I write. Certainly, other pairs were a little better bid against the US dollar as well. But they do have mostly given back some gains in early Asia this morning.
1.1860/65 is the key short-term support and then we have trendline support at 1.1850and recent support at 1.1835/40. For me though it's a break of 1.1820, which would confirm a run toward 1.1660/80.
Topside resistance is 1.2004, 1.2030/35 and 1.2090.
USD/JPY is up 0.31% from Friday’s close at 112.32 this morning. Resistance short term is 112.55/60 above here it is 112.71 and then 114.00/50. Support is at 111.65/75.
USD/CHF is up 0.18% to 0.9705 while the pound is up 0.1% at 1.3505. Both these currencies can make headway against the euro, if traders are worried about the elections medium term ramifications. As I wrote above I'm not sure and will simply follow the price action.
One thing worth noting for Sterling though is that the election, and the new coalition Merkel needs to form, may impact Germany's stance on Brexit. For the moment though the pound is clearly struggling at these levels and needs to break to a new high or a classic reversal setup is looming. I'm waiting for a signal.
I've done my usual AUD/USD piece for the day. You can read it here. But the synopsis is that the Aussie is doing impressively given the big falls in iron ore, copper, and steel prices. But it does look heavy.
The kiwi is a little heavy too. Bill English and his National's fell agonisingly close to a majority but missed it by 3 seats. That introduces some actual uncertainty even though English is in the box seat to negotiate with New Zealand First leader Winston Peters on a coalition.
At 0.7290 NZD/USD is down 0.7% since Friday's New York close. A break of 0.7270 would suggest a run back to 71.9/72 cents where trendline support rests.
Last but not least, the Canadian dollar. USD/CAD is at 1.2346 and looking like it is pointed higher. But 1.2420 needs to break. As the leader of thee US dollar pack, both down and back up USD/CAD is for a bellwether at the moment.
Have a great day's trading.