Next 24 hours: Euro and Pound Bid, JPY Hit, Commodity FX Crushed
Today’s report: Will the Pound’s Run Hold Up?
France election risk is out of the way and the market is turning its attention back to some of the other big themes at the moment. Geopolitical risk is one of those themes and all eyes are on developments out of North Korea to see what it might do to provoke its neighbors and escalate tension.
Wake-up call
Chart talk: Major markets technical overview video
- Le Pen
- election euphoria
- BOJ Iwata
- France polls
- risk rally
- US tarrifs
- ANZAC holiday
- Macron play
- Larger players
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- How May's Election Gamble Could Backfire, S. Nixon, Wall Street Journal (April 24, 2017)
- China Stocks Sink Most in Four Months, S. Costa, Bloomberg (April 24, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market has now cleared major resistance at 1.0906, breaking to a fresh 2017 high, while confirming a higher low at 1.0570. The break strengthens the case for a major bottom and opens the next upside extension towards the 1.1400 area. Setbacks should be very well supported, with only a break back below 1.0570 to compromise the constructive outlook.
EURUSD – fundamental overview
The Euro has done a good job holding onto its gains from the Monday gap open on the back of the news of the Macron victory in the first round of the French election which puts the candidate at very good odds to win out in May. This has eliminated systemic risk to the global economy associated with a Le Pen win. Even the news of her stepping down from her party in an effort to appeal to a broader audience hasn’t done much to worry the single currency, which instead has been more comfortable settling in to it’s new postal code. In the lead up to the French election there was already a healthy amount of Euro demand in anticipation of soft US Dollar policy and the reduction in risk to the Zone from the election makes the Euro even more attractive as an alternative funding currency. Looking ahead, the market will monitor developments on the geopolitical front, while also taking in US data featuring the Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index. Of course, the market will also be thinking about the US administration’s tax plan and the ECB meeting later this week.
GBPUSD – technical overview
This latest break back above the December 2016 peak is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base. Still, it will be interesting to see how the market responds above 1.2775 and if it can hold above the level in the sessions ahead. If the market holds above 1.2775 in the sessions ahead, it could pave the way for the next major upside extension into the 1.3500 area. If the market is unable to hold above 1.2775 it will suggest a false break and could open renewed downside. In the interim, key levels to watch above and below come in at 1.3000 and 1.2616 respectively.
GBPUSD – fundamental overview
As far as today's calendar goes, we get UK public finance data and the Pound will look to see if it can hold up following last Friday's disappointing UK retail sales print. Meanwhile, the Pound’s euphoric rally on last week's snap election news could be at further risk if the market loses confidence in the election's ability to make for easier negotiations with the EU. The probability of Macron as the next President in France is also not doing any favors for the Pound, with the candidate a well known critic of the UK leaving the EU. Later in the the day, we get a batch of data out of the US that includes Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index. Of course, the market will also be looking to see if there is any new detail that emerges on the US administration’s tax plan.
USDJPY – technical overview
The recent break of a multi-week range low at 111.60 marked an end to a 400 point bearish consolidation that has now opened the next major downside extension towards a 400 point measured move that targets 107.60 in the sessions ahead. As such, Look for any rallies to be well capped ahead of  111.00, while ultimately, only a daily close back above 112.20 would take the immediate pressure off the downside.
USDJPY – fundamental overview
BOJ Iwata was on the wires earlier saying the central bank would continue to conduct monetary policy to achieve its CPI target, while adding it was premature to talk about QE exit as it would confuse the market, particularly with no need for such a conversation given the inflation target was still a long way off. Meanwhile, the renewed wave of buying in US equities has played into price action, with these two developments driving Yen weakness. At the same time, inability for the major pair to fully close the Monday open gap leaves room for another downside move, while geopolitical risk with North Korea is also capable of inspiring a fresh wave of Yen demand. Looking ahead, the market will monitor the developments on the geopolitical front, while also taking in US data featuring the Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index. Of course, traders will also be looking to see if there is any new detail that emerges on the US administration’s tax plan and this latest news of tariffs on Canada which could signal the start to US administration moves to clamp down on Japan as well.
EURCHF – technical overview
Rallies continue to be very well capped, with the market adhering to a broader downtrend of lower tops and lower lows. The most recent rallies have stalled above 1.0800 and a fresh medium-term lower top is sought below 1.0900 ahead of the next major downside extension through the 2016 base at 1.0624 and towards 1.0400 further down. Ultimately, only back above 1.0900 would negate the overall bearish outlook.
EURCHF – fundamental overview
The SNB is in a quiet battle with the market, forced to contend with an ongoing wave of demand for the Swiss Franc in a less certain global environment, especially with the weapon of monetary policy worn down. The central bank has been committed to its mandate of ensuring the Franc does not appreciate further. But despite all efforts, the Franc continues to want to appreciate. It seems the central bank’s strategy has been to sell Francs when risk comes off and to do nothing when risk is back on and natural flows should be CHF bearish. But the trouble is, even with global equities elevated, arguably reflecting appetite for risk, the Franc hasn’t been able to weaken all that much. Clearly the news of the Macron victory in the first round of the French election has been a help to the SNB, but it remains to be seen whether this latest round of Swiss Franc declines can be sustained.
AUDUSD – technical overview
The impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7600 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. However, the market will need to see a daily close below previous support at 0.7475 to strengthen the bearish outlook. In the interim, any rallies should be well capped below 0.7700.
AUDUSD – fundamental overview
The Australian Dollar is taking a back seat today on account of the ANZAC holiday, with most of the attention already feeding through to the Euro and Yen as the market digests the election result in France. While the news has been supportive of the risk correlated commodity currency, the concurrent decline in commodities prices and concerns on the domestic front are keeping bulls from wanting to jump into Aussie longs. Looking ahead, the Australian Dollar will be thinking about tomorrow’s important inflation data but in the interim, the market will be watching mostly from the sidelines, taking its cues from the broader external flows. As far as today’s data goes, we get the Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index.
USDCAD – technical overview
The market remains very well supported on dips, with this year’s bounce out from the 1.3000 area warning of a more significant bullish resumption. Any setbacks should now be very well supported above 1.3200 on a daily close basis in favour of an eventual push back through the multi-day peak at 1.3599 and towards 1.4000 further up. Ultimately, only back below the 2017 low at 1.2969 would force a meaningful shift in the structure.
USDCAD – fundamental overview
Canadian Dollar movement in Asia on Tuesday has been a big story, with the Loonie sinking to a yearly low against the Buck on the news of the US imposing tax on lumber imports, while also announcing intentions to impose an additional tax on milk. Canada officials have fired back with their distaste for the move, which is more significant on a global scale given the fact that this could be first signs of the US administration moving ahead with its protectionist policy that many fear will spark a global trade war. More comments are expected as the day goes on, but clearly the Loonie has not been loving the news and is at risk for additional declines. Looking ahead, as far as today’s data goes, we get a healthy batch out of the US with Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index all due.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7400 compromises the outlook.
NZDUSD – fundamental overview
Last week was a good week for the New Zealand Dollar, with the currency up against the Buck on broad US Dollar selling, a well received GDT auction and hot New Zealand CPI. But in the grand scheme, there is also quite a bit of uncertainty and uneasiness out there relating to geopolitical risk, US policy moves that threaten trade wars, softer commodities, fear of an overinflated global equities and favourable US Dollar yield differentials. As far as today goes, we have been seeing cross related selling against Aussie, though with both New Zealand and Australia on ANZAC holiday, trading has been thin. Looking ahead, Kiwi will take its cues from broader external themes including US policy, geopolitical risk and stocks. As far as the data goes, we get a healthy batch out of the US with Case Shiller, new home sales, consumer confidence, and the Richmond Fed manufacturing index all due.
US SPX 500 – technical overview
An extended run to record highs is finally showing signs of exhaustion in 2017, with the market enter a period of correction. This opens the door for a possible acceleration of declines towards 2270 in the weeks ahead, with a daily close below 2320 to strengthen the outlook for a more significant structural shift. In the interim, rallies should be well capped below 2380.
US SPX 500 – fundamental overview
Bulls remain in control overall despite recent setbacks, though there have been legitimate cracks at the surface in the month of April. This month’s Fed Minutes citing equity overvaluation and possible balance sheet shrinkage later this year haven’t been stock market positive, while the rise in geopolitical tension and sup-par Goldman Sachs earnings are only increasing stress. Furthermore, the market is waking up to the fact that the new US administration’s alternative take on diplomacy could make for a less predictable path for equity markets. But again, for now, only tiny cracks, with investors still comfortable playing the game of trading sideways (not down) on stress and then rallying to fresh record highs on any signs of an elimination of the stress. Macron’s victory in the first round of the French election has significantly reduced systemic risk associated with the election and has been responsible for this latest surge.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016. This latest break to another yearly high through 1265 strengthens the outlook, confirming the next higher low at 1195, while opening the door for the next major upside extension towards a measured move into the 1335 area. Look for any setbacks to be well supported ahead of 1230, with only a break back below 1195 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Meanwhile, a bout of US Dollar selling (bullish gold on inverse correlation) in 2017 has also kicked in as the market gives more serious consideration to US policies that are likely to direct the US Dollar lower.
Feature – technical overview
USDTRYÂ has been in a period of choppy consolidation since topping out at a fresh record high earlier this year. At this point, the structure continues to favour the topside, with scope still existing for a bullish continuation to yet another record high. At a minimum, a break and close back below 3.5580 would be required to potentially force a shift in the outlook and open the door for a more significant bearish corrective phase.
Feature – fundamental overview
The currency market is still taking time to digest the latest result in the Turkish referendum which produced a narrow “Yes” victory for President Erdogan. On the one hand, the result can be viewed as Lira supportive as it reduces political uncertainty which should translate into more stable economic policy. On the other hand, the move to grant an unlimited amount of power to the President could pose risk on the global stability front, which would be viewed as Lira bearish. And so, the Lira has been mostly sideways in the aftermath. Of course, going forward, geopolitical risk, the US administration’s protectionist policies and possible vulnerability in global equities are other themes that need to be considered with respect to the outlook for the emerging market currency. Into Monday, the Lira has received a bid, though this has come from US Dollar selling and risk on flow post France election results.