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
Ouch. The US dollar came in for a hammering overnight after Mario Draghi gave a really upbeat take on Europe. Not just on growth but on the eventual return of inflation to the Eurozone.
In an attempt - I think - to temper upward pressure on the euro Draghi was careful to continue to say the EU needs additional monetary accommodation in order to entrench this more positive outlook. But traders only heard the message that ECB policy is shifting.
So euro rocketed with sterling joining the party when Marke Carney took some of the capital relief he'd given the banks last year in the wake of the Brexit vote. It's viewed as the first step to higher rates in the UK.
Elsewhere the Canadian dollar is back at recent highs while the Aussie and kiwi were chased back from yesterday's strength.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
If you want to read a deeper dive into what Mario Draghi had to say please see my comments in the Morning Markets Wrap today.
The key for me though is the paragraph where he essentially says the ECB will move policy as the economy recovers without making it actually tighter.
“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged,” Draghi said.
This is the non-tightening tightening. But it’s still a tightening for forex traders.
Anyway - On the US dollar, it was an ugly night.
Suffice to say it is under pressure unless or until the data turns and starts to reinforce the Fed’s tightening cycle. Last night the IMF downgraded the outlook for US growth as the Trumponomics agenda stalls. And it’s clear that traders are focussed on the recent run of poor data and what’s clearly the fear that the Fed could further harm growth with tightening.
The Citibank economic surprise index is still languishing at -77.5 this morning. Next week's data flow and non-farm payrolls are super important for the outlook.
The Fed is unlikely to be persuaded from its course just yet - see Morning Market Wrap for more discussion - but the data truly has to turn otherwise the Fed will have no choice to but to recognise it could be wrong.
So for the moment when it comes to the US dollar the path of least resistance – the one traders look for when they are following the price action – still seems to be lower. If the data turns we could see all heck break loose to the topside. That's out in the never never somewhere - for now the only good thing I can say about the US dollar is at least it hasn't broken the recent low. Here's the chart of US Dollar Index.
But that's out in the never never somewhere - for now the only good thing I can say about the US dollar is at least it hasn't broken the recent low. Here's the chart of DXY.
But for now the euro and many other currencies are surging again. Euro is at 1.1336 this morning. Looking way overcooked quite frankly on the charts - so a pullback would not surprise.
Draghi gets another go tonight at a high-powered central bank panel discussion. So we'll see if he tries to rein in the rhetoric.
On the dailies the break of 1.13 opens the way to the top of the downtrend channel EUR/USD has been in broadly since August 2015. It's in the 1.1450/70 region. On the day though the 1.1280/85 region might attract.
Here's the very overcooked daily chart:
Mark Carney, BoE governor, performed a non-tightening tightening overnight. He raised capital requirements which had been relaxed last year after Brexit. It means there is less cash available for banks to lend effectively as it lowers bank leverage. Forex and bond traders took this as a first step in the road to higher rates and sign the BoE is indeed soon about to begin its monetary tightening.
So this morning GBP/USD is at 1.2811 having busted out of the recent downtrend but still within another traders might have liked to draw in.
Here's the daily chart:
The Swiss franc has had a huge surge of more than 1% as well and is at 0.9602 as I write this morning. The US economy is the winner here if these moves persist.
Looking elsewhere what’s interesting about the moves overnight is how the Aussie and kiwi were chased back from their highs. The Aussie failed again below the 0.7635/40 region and it has lost substantial ground on the crosses. You won’t be surprised to hear me say that Mario Draghi’s speech may be the source of that reversal. Not directly perhaps, but it certainly reinforces the notion that traders have other markets offering better opportunities in which to deploy their capital.
I've done a full AUD/USD column as usual which you can read here.
The Canadian dollar was back testing recent lows at 1.3165 when oil was at its peak. But it's back off to 1.3180 after the inventory data derailed the oil rally this morning.
I'm out, my system was stopped with the move overnight.
The daily chart shows a clear downtrend and the rejection of the 200-day moving average at 1.3330 last week reinforces this. I should have bailed the ful position on the double failure at the 200 day ma last week.
Here's the daily chart:
Have a great day's trading.