Big Move Needed To Change US Dollar Sentiment
Axi | Jul 31, 2017 12:16
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.
h2 RECAP/h2Watching the price action of the US dollar at the moment, and since the last non-farms release, I am minded of the time after the euro's launch when traders only focused on the negative. During that time, anything bearish was accentuated and bullish news, data, or events was simply ignored.
Eventually, the EUR/USD fell into the low 80 cent region against the US dollar, before a recovery.
It seems a little of this "accentuate the negative" approach might be playing out for the dollar - and the US economy - right here and right now, if forex traders reaction to a fairly solid 2.6% gain in Q2 GDP Friday is any indication.
The result has been that euro is back near 1.1750, the Canadian dollar has driven USD/CAD down to the mid/low 1.24's, the yen is back at 110.60, and sterling is above 1.31. Sure the Australian dollar is lagging but it has its own issues at the moment as traders await the RBA this week.
It's still pretty much all about the US dollar at the moment. The path of least resistance looks lower for it. If that comes to pass and if the US dollar breaks breaks last week's lows sentiment will sour further.
h2 HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS/h2As noted above the US dollar can’t take a trick at the moment. Friday’s 2.6% Q2 GDP print wasn’t terrible by any stretch of the imagination. It was in line with expectations, but growth in Q1 was downgraded to 1.2%. Q2 growth showed a boost from consumption and business spending which is a good sign for the outlook.
But the bears decided to focus instead on the lack of wage price pressure means that the Fed has plenty of time in which to raise rates.
So the US dollar pretty much reversed the gains it had made the night before. Sentiment has turned so sour that traders and investors are going out of their way to accentuate the negatives, and dismissing the positives, in the data and news.
Of course that is important for my assertion that the US dollar might find some support because much, if not all, the bad news about the US economy, the Fed, and this flailing Trump presidency was already factored into the price of the US dollar – in US Dollar Index terms, against the euro, and in other pairs.
I could be utterly wrong on that if folks are only focused on bad news for the US and good news for everywhere else. That would suggest an environment where the US dollar has few friends. But with the Citibank US economic surprise index still at -44.5 what's also clear is the data still has a long way to go to start printing strong enough to turn sentiment.
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Maybe Friday's non-farms can shot the lights out. Perhaps it could be PCE data Tuesday, PMI's and ISM on Thursday maybe. Or maybe not as may be the case.
Turning to the price action then.
EUR/USD is back up near last week's highs and really challenging any notion that the zenith on this run may be in place. 1.1775/80 (last week's high) and the top of this current trend channel which comes in at 1.1800/10 look like the key resistance levels at the moment.
The trend is your friend, as they say - but equally euro is getting stretched on both the daily and weekly charts. That said their looks like there is still support for EUR/USD in the 1.1600/20 region. A break below here would be needed to turn the outlook to something more sour.
Looking at the commodity bloc my system has triggered me long Aussie and Canadian dollars against the US dollar after Thursday/Friday trade.
On both trades the usual stop losses are in place and I have faith in my system overall, but as you can see in the USD/CAD on Friday we saw a very sharp reversal for the dollar.
At 1.2436 this morning USD/CAD is back near the lows.
Likewise, other pairs are back near their highs against the US dollar. The pound has climbed back above 1.31 and is at 1.3122 as traders await a very important Bank of England meeting this week.
The data recently has been sufficiently mixed to suggest Mark Carney and his colleagues on the Boe's Monetary Policy Committee wsill vote to leave rates on hold.
Kristin Forbes, the leader of the BoE hawks, has left the bank and has been replaced by Silvana Tenreyro of the London School of Economics as a new member of the MPC. She'd be likely to vote with the majority at her first meeting I'd guess. But what will BoE chief economist Andrew Haldane do?
It's an interesting question. One traders will be watching closely, both in the decision, the governor's statement, and the minutes to the meeting which will all be released Thursday night Australian time.
Looking at the price action GBP/USD is on the cusp of another step higher if 1.3155/60 - last week's highs - gives way. And that is possible if there is a rotation toward the pound away from euro where my system has generate a short in EUR/GBP late last week.
We'll see. Here's the GBP/USD chart.
USD/JPY is down at fresh lows for this run this morning at 110.55. The yen has lagged the moves in other currencies and may be benefiting - and may continue to - the slow motion train wreck that the trump administration is becoming.
Whether it is the failure to launch of Trumponomics, horribly stalled amid the president's moribund agenda, or the rising tensions between the US and Russia the yen, like the pound, looks like it might play a little catch up to some of the other moves we've seen recently in forex markets.
Or at least it might outperform on the crosses.
I've been trying to draw USD/JPY as either up and down trends over the past 6-months but maybe this is just a great big range and USD/JPY is heading back under 109? Here's the chart anyway.
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