The US Dollar's Outlook Remains Clouded
Axi | Aug 21, 2017 13:32
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/h2A set of scales is the right picture for this column today.
That's because the question of whether this is the second, uncertain, wave in what is a broader US dollar recovery or perhaps the end of the pause in the US dollar's recent multi-week trend lower remains unresolved.
And the question remains undecided for very good reasons.
Will the ECB fight back against a worryingly strong euro at risk of further gains? Will the Fed shake off market worries about inflation and stay its own course? Is Trumponomics dead? Or was Steve Bannon's ouster a sign that the "globalists" - as he calls them, the "adults" most of the rest of call them - are in charge now and the Trump agenda is back? The data has to play ball too.
So we start the week with euro at 1.1750ish, USD/JPY at 109.36, GBP/USD at 1.2872, and the Aussie dollar back above 79 cents at 0.7927. The Canadian dollar is better bid at 1.2590, the kiwi is atop 73 cents and the Swissie is at 0.9650.
h2 HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS/h2The dollar lost ground across the board to end the week on the back foot, but actually higher – at least in US Dollar Index terms - over the course of the week.
As I have been writing recently forex traders are in two minds right now about the outlook for the US dollar. Are we at the point where the recovery is over and a new wave of US dollar weakness is set to begin. Or, are we in the hiatus after the initial spurt before the US dollar rallies again.
That depends on many things – not least of which is whether the Trump Cabinet can stay the course, what the ECB does – or does not – do, tensions with North Korea, and of course how the data flows. After selling off for months a few short days is not enough to give us the answer.
After selling off for months a few short days is not enough to give us the answer. So I won't pretend to know the answer now. As readers know I exited my US dollar shorts, long currency, positions last week.
So I'm going to watch what central bankers say, what they do, how the market reacts to same, and how the data flows. If something awful happens on the Korean peninsula it would be a surprise - given it is in no one's interest for obviously heightened sensibilities to morph into war.
But if something happens the yen would surge, the Aussie would get hit, and every other currency would find its place in the list of winners and losers
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In pure price action terms however, the determinant of the outlook is more straight forward. We have seen currencies like the Aussie, euro, yen – and others – respect important technical levels and then consolidate. Thus, we effectively have the parameters on which we can judge the question of the next leg of the US dollars move – up or down – by these clear levels.
So lets look at the charts.
One of the more interesting battles is USD/JPY at the moment. It’s at the bottom of the 2017 range again. And while it has a little room to run to make a new low the outlook is clear if it breaks. Here’s the chart:
I've written my usual AUD/USD column, which you can read here, Suffice to say the lack of catalysts locally means that its fortunes are going to be driven from offshore. 0.7960 looks like a tough top for the moment. But a break would signal a run toward 0.8020.
Looking at the euro now. I'm not convinced it is out of the woods yet. I'd have to see it trade up and through 1.18 to confirm that the low of around 1.1660 was a sustainable one. Equally, though EUR/USD is just in a 1.1660/1.1920 range for the moment with either side needing to break to signal the next big move - both for EUR/USD and possibly the US dollar more broadly.
GBP/USD might be in for an interesting week. That's certainly true relative to the rest of the forex landscape bereft of any key drivers. Rather the UK has two important events this week with the House of Commons Treasury Committee hearings ion hearings on inflation Wednesday offering a chance to explore BoE thinking and outlook.
LIkewise, Friday's Q2 GDP is important in this debate about the outlook for growth and inflation in Britain and what that might mean for BoE policy and the pathway - potentially - to higher rates.
Chartwise GBP/USD still looks pressured. A break of last week's low at 1.2830 would suggest a move of 80 points to the next - minor - Fibo level. More broadly it would suggests a move under 1.26 where the latest rally started from.
The Canadian dollar is stronger again after oil's big surge and the fall in the US dollar. That said though at 1.2594 (as I write this section) it's 40 points off Friday's low which also happened to be the 61.8% retracement of the recent rally in USD/CAD.
That sets up the key parameters in the short term for USD/CAD os 1.2555 support and 1.2640 resistance which is the very short term downtrend on the 4-hour charts.
The NZ dollar is consolidating as well. A break of 0.7270 is needed for its fall to resume short term with larger support in the 0.7200/20 region.
Likewise USD/CHF and USD/SGD are grading in a short term range waiting for the next US dollar shoe to drop.
Have a great day's trading.
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