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
I'm going to have a tough few days this week.
I say that because Friday's EUR/USD rally was on the back of what looks like another messy communication effort from ECB boss Mario Draghi to acknowledge growth in the EU and also lowflation and its implication for ECB policy. And just like last time I expect him to have to now rouse himself, his deputy, and his chief economist to hose down the euro bulls.
So my rhetorical self - the one who writes these notes - doesn't trust the rally.
But my price action self, my system, has so many signals this morning in the US dollar index, euro, pound, Singapore dollar, yuan and so on it is not funny. We could be about to see the US dollar break wide open.
Non-farm payrolls on Friday couldn't come at a more critical time.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
Just quickly on Draghi.
He said “the global recovery is firming up” but noted that in Europe and Japan “the consolidation of the recovery is at an earlier stage versus that of the US.” On the outlook for Europe he said "we have not seen yet the self-sustained convergence of inflation to the medium-term objective," adding "therefore a significant degree of monetary accommodation is still warranted,".
So, paraphrasing, monetary policy is likely to remain accommodative and there is set to be an interesting discussion with Jens Weidmann and his hawks at the next meeting.
He tried to again make this point in response to a question with Reuters reporting “On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term. On the other hand, we have to be very patient because the labor market factors and the low productivity are not factors that are going to disappear anytime soon." It’s worth remembering the ECB is a single mandate – inflation – central bank.
All he had to do was throw in a comment about the euro.
But he didn't, and it's not the first time he's implicitly goosed the euro higher. So he owns this one. We'll see if - like previous episodes this year - he tries to unwind the impact of his comments in the run up to the next ECB meeting.
And of course he may not be able to even if he wants to given debate about the US debt ceiling over the next month. At a time when US data has been awful for months the debt ceiling debate couldn't have come at a worse time.
Certainly, US data improved over the past 6 weeks but last week's data flow was mixed at best with the Citibank Economic surprise index finishing at -32.3 for the US. That's against +19.2 for the EU, +35.4 for Australia, +21.2 for China, and even -16.6 for Japan and -29.8 for the universally awful UK.
So it's no surprise the US dollar has been under pressure.
That gap in the US dollar index is naturally analogous to the gap the euro has entered into in the 1.1710-1.2030 region I referenced Friday.
That zone is a confluence of lows and highs for the euro between 2010 and now. A break back above this zone could usher in a run of 1, 3, or 7 big figures for euro. Mario Draghi and his colleagues on the ECB governing council will not be pleased by that regardless of what traders thought Friday.
While the US dollar was weaker across the board the moves across forex markets were not uniform. GBP/USD surged from below 1.2800 to sit at 1.2900 as I write.
The high this morning around 1.2930 was back toward the trendline it broke down through 2 weeks ago.
USD/JPY too has lost ground as the US dollar’s fall gave the yen room to head back toward the bottom of the range – it’s at 109.26 as I write.
108.60 is the bottom of thee range recently and thee level to watch with the April low in the 108.00/10 region the one traders would need to see break to signal a shift beyond the range.
I've done my usual daily AUD/USD column. The key takeaway is that 0.7962 is the key level to watch topside which 0.7880 is the uptrend line for this rally from below 74 cents. You can read my piece here.
The New Zealand dollar was lifted from recent lows near 0.7190 and is at 0.7251 this morning. Traders still hold some concerns about the outlook for the economy and the potential that lower forecasts could prime minister English’s government lose the election.
0.7280 is my fast moving average and a level I'm watching.
The Canadian dollar is stronger with USD/CAD at 1.2470. That’s just 50 points or so above the recent lows set in late July before the US dollars month of consolidation began.
So the big question, but also the feeling, among forex traders after the euro’s surge and these associated moves, is whether August's US dollar’s consolidation is now over? And if so, how low will it go?
Quite some way if things really kick off.
Have a great day's trading.