FX Watching European and US Politics

GBPUSD – technical overview

This latest impressive run to the topside has stalled out ahead of critical resistance in the form of the December peak at 1.2775. While we could still see a test and overshoot beyond 1.2775 in the sessions ahead, the market would need to establish a weekly close above this level to suggest a major base in place and force a bullish structural shift. Until then, expect any moves into or through 1.2775 to stall out. A daily close below 1.2400 will increase bearish prospects and open the door for a drop towards 1.2000.

• R2 1.2707 – 2Feb high – Strong
• R1 1.2547 – 7Feb high– Medium
• S1 1.2400 – Confluence – Strong
• S2 1.2346 – 7Feb low – Medium

GBPUSD – fundamental overview

The Pound did a fabulous job fighting through an initial wave of US Dollar strength early Tuesday, brought on by European political risk and a hawkish wave of Fed comments. The source of the UK currency’s recovery came from hawkish BOE Forbes comments, with the central banker warning of the possibility of higher rates sooner than later. Still, the Pound will need to be careful not to get too far ahead of itself with Brexit risk expected to keep the UK currency capped, especially with the market waiting for the outcome of the House vote on Article 50.

USDJPY – technical overview

The recent break below 112.50 strengthens the short-term bearish outlook and could open a deeper drop towards a measured move objective in the 109.50. But ultimately, setbacks are expected to be well supported below 110.00 in favour of that next medium-term higher low and bullish resumption towards 120.00.

• R2 113.49 – 3Feb high – Strong
• R1 112.78– 6Feb high – Medium
• S1 111.59 – 7Feb low – Medium
• S2 111.36 – 28Nov low – Strong

USDJPY – fundamental overview

The Yen continues to find demand from HFT and algo types, with the currency benefitting from softer US Treasury yields and some risk off flow. China's reserves have dipped back below $3 trillion for the first time in nearly 6 years, which could be a warning sign for elevated risk assets. Earlier, the BOJ’s summary of opinions flagged concerns over yield curve control although this hasn’t done anything to move the market much. Lack of economic data on today’s calendar will leave the Yen trading on broader themes and flows.

EURCHF – technical overview

A recent close below 1.0800 which had been defined as the bottom of a multi-week range has strengthened the bearish outlook, opening the door for additional declines towards the 2016 low at 1.0624. At this point, a daily close back above 1.0763 would be required to take the immediate pressure off the downside.

• R2 1.0763 – 30Dec high – Strong
• R1 1.0708 – 3Feb high – Medium
• S1 1.0638 – 30Jan low – Medium
• S2 1.0624 – 24Jun/2016 low – Strong

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 buy Euro 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 global appetite for risk, the Franc is still not depreciating. Of course, the reemergence of Eurozone political risk is only adding to SNB stress, with the Franc finding even more demand on the back of these developments.

AUDUSD – technical overview

The market has entered a healthy bullish phase after setbacks stalled shy of key medium-term support at 0.7145 in late December. Still, overall, rallies continue to be very well capped on a medium-term basis, with only a daily close back above 0.7800 to compromise this outlook. Look for a daily close below 0.7500 to officially put the pressure back on the downside.

• R2 0.7779 – 8Nov high – Strong
• R1 0.7697 – 2Feb high– Medium
• S1 0.7578 – 2Feb low – Medium
• S2 0.7512 – 27Jan low – Medium

AUDUSD – fundamental overview

The Australian Dollar was weaker on Tuesday, though most of the weakness was attributed to the broad based rally in the US Dollar on the back of ongoing hawkish Fed speak. But Aussie has held up well overall in 2017 and is once again finding bids into dips early Wednesday. The RBA left policy on hold as widely expected this week but the fact that the central bank offered mild hints it could be done cutting rates has been enough to give the currency a prop. Interestingly, news of China’s reserves dipping below the $3 trillion mark for the first time in nearly 6 years has not done anything to rattle Aussie bulls thus far. Looking ahead, absence of economic data will leave the market focused on broader macro themes.

USDCAD – technical overview

Despite recent setbacks, look for the market to continue to be well supported on dips into the 1.3000 area ahead of the next major upside extension back towards the December peak at 1.3600. In the interim, a daily close back above 1.32000 will help take the immediate short-term pressure off the downside.

• R2 1.3300 – Figure – Medium
• R1 1.3213 – 7Feb high – Medium
• S1 1.3075 – 7Feb low – Medium
• S2 1.3000 – Psychological – Strong

USDCAD – fundamental overview

The Canadian Dollar wasn’t able to benefit much from an impressive round of Canada data on Tuesday after the country produced a much larger than expected surplus while also getting an upward revision to trade numbers. It seems a 2.1% drop in non-energy exports was a bit of a downer and could have tempered enthusiasm. Meanwhile, a retreat in the price of OIL and some broad based US Dollar demand on hawkish Fed speak also helped to more than offset the positive Canadian trade data. Looking ahead, absence of first tier data will leave the market focused on broader macro themes.

NZDUSD – technical overview

Despite this latest upside correction in 2017, the overall pressure remains on the downside with the market expected to be very well capped on rallies into the 0.7400 area. The weekly chart is reflective of this fact as it looks like we are seeing the formation of a major top off the 2016 high. As such, expect the market to stall out over the coming sessions in favour of that next lower top. Back below 0.7200 will help strengthen this outlook.

• R2 0.7403 – 8Nov high – Strong
• R1 0.7376 – 7Feb high – Medium
• S1 0.7279 – 7Feb low – Medium
• S2 0.7222 – 26Jan low– Strong

NZDUSD – fundamental overview

It looks like the New Zealand Dollar is finally waking up to the fact that it has seen a really nice run in 2017 and could be vulnerable to a healthy retreat in the sessions ahead. Remember, last week’s New Zealand employment data was a big miss and with the RBNZ decision due early Thursday, the softer Kiwi jobs data and an elevated Kiwi rate could be some of the things the RBNZ addresses, which would be Kiwi bearish. Still, the RBNZ is not expected to make any policy changes. Looking ahead, absence of first tier data will leave the market focused on risk sentiment and broader macro themes.

US SPX 500 – technical overview

The latest break to yet another record high following a healthy period of consolidation, opens the door for the next big push towards a measured move objective in the 2320-2340 area. While there could be signs of exhaustion on the horizon, given the intensity of this uptrend, a break back below 2232 would be required at a minimum to alleviate immediate topside pressure.

• R2 2320.00 – Measured Move – Strong
• R1 2304.00 – 26Jan/Record high – Medium
• S1 2254.00 – 12Jan low – Strong
• S2 2232.00 – 30Dec low– Strong

US SPX 500 – fundamental overview

The record run in US equities has been more than impressive, particularly at a time when the Fed is embarking on a hawkish path to policy normalisation and the Trump administration is focusing more on protectionist policies that threaten prospects for stability and global growth. This leaves financial markets vulnerable to any shocks and exposed to intense periods of additional risk liquidation going forward. The fact that monetary policy around the rest of the globe is exhausted with very little left in the tank to artificially support risk assets is yet another major concern. The reemergence of European political risk and this latest news of a dip in China reserves below $3 trillion only adds to this concern.

GOLD (SPOT) – technical overview

The market has been very well supported since basing out around 1120 in 2016. This latest break through 1220 confirms a fresh higher low at 1180 and opens the next major upside extension towards a measured move into the 1260 area. Only back below 1180 would delay the constructive outlook, while ultimately, below 1120 would be required to negate.

• R2 1260.00 – Measured Move – Strong
• R1 1240.00 – Round Number – Medium
• S1 1200.00 – Psychological – Medium
• S2 1180.60 – 27Jan low  – Strong

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 and systemic risk. All of this should continue to keep the commodity in demand, with many market participants fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Meanwhile, soft US Dollar policy talk out from the US administration and this latest Dollar weakness in early 2017 on Trump soft Dollar talk are only making GOLD that much more attractive.

Feature – technical overview

USDMXN has been in the process of correcting out from recent record highs earlier this year. The market is now coming back into critical psychological support in the 20.00 area and is expected to be well supported around the barrier in favour of a resumption of the uptrend and push back through the record high just over 22.00. Only a daily close below 20.00 would give reason for pause and open the possibility for a more meaningful structural shift.

• R2 22.0380 – 11Jan/Record – Strong
• R1 21.3900 – 11Nov high – Medium
• S1 20.1290 – 17Nov low – Medium
• S2 20.0000 – Psychological – Strong

Feature – fundamental overview

The combination of a market that thinks it has priced in the worst case scenario from Trump’s protectionist policies, specifically targeted at Mexico, and broad based US Dollar declines in early 2017 on the back of Trump’s soft US Dollar talk, have been the driving forces behind the Mexican Peso’s recovery from January record lows. Still, with all that said, the Mexican economy is struggling and Trump has every capability of reigniting concerns about Mexico’s relationship with the US. And so, tomorrow’s Banxico meeting will be an important event to watch. The market is looking for 50bps of tightening to help offset inflation and the decline in the Peso on the back of the Trump factor, and anything less could prove to be a major disappointment, inviting renewed downside pressure on the emerging market currency. Also keep an eye on risk sentiment, which looks increasingly shaky in 2017, with any downside pressure on US equities to weigh heavily on the risk correlated emerging market currency.