US Dollar Fights Back After Solid Data Changes The Conversation

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

Data, data, data. Oi, Oi, Oi.

Or, put another way, it's the data stupid.

Last night's combination of a better than expected 3% print for US Q2 GDP and a huge 237,000 outcome for ADP employment data saw the US dollar's recovery extend into a second day.

Combined with the strong US data - and the impact that might have on Fed conversations and dot plots - there are strong technical signs that we have in fact seen the pessimistic crescendo that was needed.

So this morning we have EUR/USD below 1.19, USD/JPY above 110, USD/CHF is back toward the mid 96 cent region. the Kiwi been under 72 this morning, and the Aussie dollar looks like it had an ugly outside day.

It won't take much for non-farms Friday to really drive this trend if we see strong data.

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

For some time I've been highlighting the likely improvement in US data flow - relative to expectations - and the impact that would have on the US dollar eventually.

That's not to say the price action has been irrelevant. Readers know my rhetorical self takes a back seat to my trading self when it comes to the actual positions I put on.

But the improvement in US data has been an important pointer to the US dollar selling getting into stretched territory. Yes, as I've written recently, we do see these runs where good news - or bad - is ignored by traders. But given the US dollar moves - especially against the Euro - have been about relative central bank settings the data is important.

So the fact that latest read of US Q2 GDP growth was upgraded to 3% from the previously reported 2.6% and that it showed consumer and business investment sectors were strong in the three months to June 30 is an obvious pointer toward Fed policy actions. That is, a continuation of the normalisation process which will include the start of the balance sheet taper in September and likely another rate hike in December.

And possibly the best fundamental indicator that the US dollar is well past due a reversal from weakness is the relationship between the Citibank Economic surprise index - which rose to -21.2, its highest level since early May, after last nights data - and the euro or US Dollar Index.

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Through in the technical set-ups and the price action over the past 40 hours or so and the answer to the question I posed about whether we’d seen the pessimistic crescendo needed for a reversal in the US dollar has been answered in the affirmative overnight.

So we've ended up with a stronger US dollar as a result of the combination of positioning, stronger than expected data, and a renewed focus by some traders and investors on what the outlook means for the Fed. Throw in the recognition that the euro above 1.20 was too strong and we have traders worrying that maybe the ECB WILL be worried about the euro at these levels.

The minutes told us they already were, it's just that no one Friday evening in New York or in the early part of this week wanted to buy dollars.

So after running to 1.2070ish two nights ago, euro is back at 1.1894 this morning, down 0.6% since 7am yesterday. EUR/USD is not weak by any stretch of the imagination, not yet.

So in the short term 1.1860 is support then 1.1800/15. A break of the latter level would suggest a move back to 1.1660/80. But in the grand scheme of things that's the support that would need to break to really turn the outlook bearish.

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USD/JPY is up half a per cent at 110.35 this morning. It's seen a solid bounce off the bottom of the 2017 range with this move of more than 200 points from this week's low.

110.90/111 is the key area of resistance. A break, or fail, up there would be an important sign of the US dollar's next move.

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GBP/USD is holding firm at 1.2921 and falls squarely into the nothing to see here category when it comes to the charts this morning. 1.2970/1.3000 and 1.2900/20 are the levels that need to break to open up the next move.

Looking at the commodity bloc the Aussie is under a little pressure but still holding around 79 cents as traders await today's Capex data in Oz and PMIs in China. I've done my usual daily column which you can read here.

The kiwi is got hammered down to a low around 0.7188. That's ever so marginally below the 0.7190 I've flagged as level the NZD/USD shouldn't close below on a daily basis.

It's a little higher now at 0.7205 but RBNZ governor Wheeler will be pleased after he called for a lower kiwi yesterday. The Canadian dollar is down as well with USD/CAD up 0.89% to 1.2622.

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Have a great day's trading.