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
It was a night of two halves where the US dollar came under heavy selling pressure early as traders anticipated a dovish Fed on the back of the recent run of weaker than expected US data and the overnight release of poor retail sales and inflation data.
That saw the US dollar hit a 7 month low in Dollar Index terms with the associated selloffs across almost the entire foreign exchange universe for US dollar pairs.
But all that reversed quickly when the FOMC not only raised rates but delivered a hawkish outlook for rates and the tapering of the balance sheet. In fairness, it wasn't really hawkish at all - just consistent with what they have been saying recently.
But to the extent that it was much more hawkish than the forex doves had thought we saw sharp reversals in the dollar universe. The question is can the US dollar kick on now or whether it's back to US dollar weakness.
Here's a deeper dive - in a little more detail and with a few charts
The Fed was unequivocally hawkish. I've written more about the actual Fed outcome in my Daily Markets Wrap column. But the takeaway is that chair Yellen and her colleagues have lowered their expectation for the unemployment rate in 2018 from 4.5% to 4.2%, increased their economic growth rate to 2.2%, and signalled they are looking through the dip in inflation.
As a result, the Fed signalled that it is not to be swayed from the path of raising rates and reducing the size - tapering - of its balance sheet. Another hike is expected in 2017 and possibly 4 more in 2018 - as well as the balance sheet shift. That is in star
That is in stark contrast to what foreign exchange markets thought in the lead up to the meeting.
Markets were looking for a dovish hike but instead got a clear hawkish hike. Something I have been suggesting recently and in a tweet yesterday afternoon.
So we have the US dollar back at flat for the day and gaining. And when you look at the US dollar in DXY terms you see one heck of a long-tailed candle which – given it was around recent lows - suggests we might be seeing a bottom.
What's interesting about that is that we've seen another failure by the euro up near the US presidential election night high just below 1.13. At 1.1295 the euro high, before the collapse back to around the 1.1200 level, was is a huge reversal and suggests it may be time for the bulls to take back a little of their longs and the bears to get their claws out to test where the true level of buying and support in the euro is.
1.1160/65 then 1.1100/10. If the latter level breaks watch out.
And just like the long tails you can see in the DXY and euro charts above there is a similarity of reversals across the entire foreign exchange landscape.
Looking at the Canadian dollar this morning you can see the same pattern. At 1.3236 it has actually hung in really well given that oil collapsed close to 4% and the US dollar ran the bears out of the paddock pretty aggressively.
But there are signs in the price action - I'm perhaps a day early - of a reversal in USD/CAD. AS I noted yesterday in my video given that price was outside the Bolly Band after a sharp move I'd pared my short back materially. I'm out now and the signs are there of a reversal.
The first sign would be for price to trade above 1.3270/75 with the 200-day moving average at 1/3335 the next level to watch.
The Australian dollar and kiwi dollar are the clear leaders over the past 24 hours with solid gains, even after the pullback from the highs.
The Aussie is at 0.7591 for a gain of around 0.75%. Things really started getting moving yesterday when the Chinese data printed solidly. That, in turn, saw the Aussie break up and through the range top at 0.7566 and then the buyers came. It’s a good example of how a quiet market can morph into a more volatile one – upside moves are still volatility – and how traders can pile in on a break. Where to now is interesting given the high overnight of 0.7635 was just 5 points below the 0.7640 level I’d highlighted this week. So target achieved essentially.
I've written more on the Aussie in my dedicated Aussie dollar piece I do each morning.
And now for the big event for the next 24 hours - the Bank of England meeting and sterling. As always the BoE will be important for the pound. I’m expecting Mark Carney and his colleagues at the bank to look through the inflation spike and concentrate on the threats to growth that political uncertainty and Brexit pose.
Last night wages growth disappointment just highlighted that the spike we saw in growth in late 2016 may have been ephemeral. I recall writing at the time that it was a reflection of the fact that having voted for Brexit it wasn't scaring households.
What's clear in the recent election though is that British sentiment has shifted a little. And with Theresa May still trying to stitch up a deal with the DUP, and with wages under pressure, and uncertainty - and prices - rising Marke Carney and his colleagues are more likely than not to be very cautious on the outlook.
So I'm expecting him to look through the inflation spike and give a dovish message on rates. That could undermine the pound.
1.2700/20 looks like support in the short term with the overnight high of 1.2815/20 resistance.
USD/JPY is a little offered this morning after the breaking news that the Special Prosecutor IS investigating Trump. That's according to the Washington Post this morning anyway.
USD/JPY is at 109.34 at the moment. Still off the lows of the night but the Yen is doing better than other currencies right now.
The big event for USD/JPY now will be the BoJ tomorrow. I expect them to be dovish on growth and inflation and that means low rates and QE for longer. That should support USD/JPY. But for the
But for the moment the price action suggests the slide may not be over yet.
Have a great day's trading.