Special report: ECB Preview – Tight Rope Act
Next 24 hours: What’s Driving this Market?
Today’s report: What Will ECB Day Do to the Buck?
Activity is expected to pick up quite a bit later today as the market takes in the European Central Bank decision. Heading into the risk, we've seen a minor bout of position squaring kick in as some traders out there lighten up on their long Euro exposure.
Wake-up call
Chart talk: Major markets technical overview video
- ECB decision
- retail sales
- CPI target
- Positive correlation
- jobs data
- Loonie run
- external drivers
- hike odds
- Macro themes
- USDZAR
Peformance chart: Five day performance v. US dollar
Suggested reading
- Mark Yusko on Gut Instinct, J. Felder, The Felder Report (July 18, 2017)
- Forex Ripples from the Centre, R. Blitz, Financial Times (July 18, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
This run of 2017 highs has finally extended into a major longer-term range resistance zone in the 1.1500 to 1.1700 area. This comes at a time when daily studies are looking stretched, suggesting any additional upside could be difficult, at least over the short-term, with the greater risk building for some form of a meaningful bearish reversal. Still, a daily close below 1.1472 would be required at a minimum to take the immediate pressure off the topside and trigger a correction.
EURUSD – fundamental overview
It wasn’t a surprise to see the Euro deferring to sideways trade on Wednesday, with the single currency already enjoying a nice 2017 run and more inclined to ease up into Thursday’s highly anticipated ECB decision. The market will be wanting to know which way the ECB leans, with any leanings that produce a more hawkish than expected result to open the door for a push to challenge the 2015 peak above 1.1700. If however the ECB delivers an as expected or more dovish leaning decision, there will be room for a round of profit taking on Euro longs. It will be interesting to see if there is any sense of the ECB backtracking, in light on recent Yellen testimony and the Euro’s push through 1.1500. Other calendar events on Thursday include German producer prices, the Eurozone current account, US initial jobless claims, the Philly Fed and US leading indicators.
GBPUSD – technical overview
This latest push to a fresh 2017 high reinforces the prospect for an extension towards a measured move at 1.3500. However, Tuesday’s bearish outside formation suggests the market might not be ready to set out on that 1.3500 run just yet. Ultimately, the structure is constructive, though there’s room for more choppy consolidation between 1.2500 and 1.3000 before the market finally decides to get going with the push to 1.3500. A daily close below 1.2936 would strengthen this outlook.
GBPUSD – fundamental overview
The Pound has come under mild pressure since rallying to a fresh 2017 high earlier this week. While there isn’t much love going around for the US Dollar right now, the UK currency hasn’t been able to ignore this week’s softer UK inflation readings which were unexpected, forcing many hawks to reconsider their bets on the timing of that first Bank of England rate hike. Meanwhile, there is also the continued uncertainty on the political front, with the Brexit negotiation overhang likely to keep the market from wanting to run too far. As far as today goes, UK retail sales will be watched, though the Pound could also be influenced by the ECB decision and US data releases that include initial jobless claims, the Philly Fed and leading indicators.
USDJPY – technical overview
The market remains confined to a multi-day range. The latest topside failure above 114.00 strengthens this outlook, leaving the door open for a drop back towards range support in the 108.00s, also coinciding with the 2017 low from April. Ultimately, it would take a clear break through 115.50 to negate this outlook and shift the focus back on the topside.
USDJPY – fundamental overview
A lot of the early attention in Thursday trade will come from the Bank of Japan policy decision. It’s been made quite clear the BOJ isn’t interested in joining in with this latest wave of hawkishness from other central banks, with the BOJ committed to keeping policy accommodative. The appreciation in the Yen over the past week isn’t a major concern but the preference is that the Yen is moving in the opposite direction (higher USDJPY). This preference has been accommodated in the decision after the BOJ left policy on hold but pushed back its timeline for the 2% inflation target to 2019. Still, there shouldn’t be too many fireworks that come from this event risk, with the market also focused on broader macro flows, risk sentiment and fallout from the European Central Bank decision. As far as data goes on Thursday, we get US releases that include initial jobless claims, the Philly Fed and leading indicators.
EURCHF – technical overview
The market has pushed up to a fresh 2017 high through a critical psychological barrier at 1.1000 which could now open the door for an extension to retest the major peak from 2016 at 1.1200. However, inability to hold above 1.1000 in the sessions ahead would suggest a false break and put the pressure back on the downside for an acceleration of declines towards 1.0600.
EURCHF – fundamental overview
While the Wednesday move wasn’t a huge one, when considering another record push in US equities and the lower EURCHF rate, it could be something that makes the SNB nervous. Elevated risk sentiment is a big friend to an SNB committed to doing what it can to discourage appreciation in the Franc and any capitulation in US equities is likely to rattle global sentiment and invite an intense wave of unwanted Swiss Franc demand on the safe haven flow. It’s possible Wednesday weakness was a function of ECB positioning into today’s decision. Nevertheless, the fact that the Franc positively correlated with stocks is not something the SNB wants to see and could be warning of tougher times ahead.
AUDUSD – technical overview
The latest surge through major resistance in the 0.7800 area suggests the market could be in the process of carving out a meaningful longer-term base. The next major resistance level comes in at 0.8163, the high from May 2015. A clear break above there would confirm the bullish structural shift. However, shorter-term technicals are now well overextended and risk is building for a healthy bearish reversal in the sessions ahead. A daily close below 0.7910 would set up this anticipated pullback.
AUDUSD – fundamental overview
The Australian Dollar has emerged as a major outperformer in the FX market over the past week, with the currency exploding through critical resistance at 0.7800 on the back of US Dollar bearish developments, a hawkish RBA Minutes, solid data and rallying commodities prices. There have however been some negative developments into the latter half of the week including technical overextension, a report out from Westpac that RBA hawkishness should be taken with a grain of salt and a Reuters poll producing lower Aussie GDP forecasts. Today’s Aussie employment data has opened a fresh surge on the solid full time jobs component, though some Aussie longs are looking to book profits considering the headline miss and a very nice run in recent days. As far as the calendar for the remainder of the day goes, we should expect volatility from the ECB decision and the direction in equities, while US data will also be watched. Key standouts on the US calendar include initial jobless claims, the Philly Fed and leading indicators.
USDCAD – technical overview
There has been a clear shift in the outlook for this market over the past several days, with declines holding below 1.3000 and the market extending to fresh 2017 lows in the 1.2500s thus far. Technical studies are tracking in oversold territory, though a bounce may not come until the market retests the 2016 low at 1.2461. A daily close back above 1.2700 would now be required to take the immediate pressure off the downside.
USDCAD – fundamental overview
The Canadian Dollar has extended its impressive run in 2017, with the currency up nearly 9% since trading at 2017 lows in early May. The Bank of Canada’s hawkish policy shift that resulted in its first rate hike in seven years comes at a time when the Fed Chair has been sounding less hawkish, US economic data isn’t pretty and the US administration continues to battle intense headwinds. Still, with the Loonie running so far and fast and with the Bank of Canada not having the benefit of taking in Yellen’s testimony last week before hiking rates, it wouldn’t be unrealistic to start hearing messages from the BoC in the days ahead that follow Yellen and also lean back to the less hawkish side. Looking ahead, keep an eye on the price of OIL, fallout from the ECB decision, and a batch of US releases that include initial jobless claims, the Philly Fed and leading indicators.
NZDUSD – technical overview
Despite an impressive rally in recent weeks, the market remains confined to a longer-term range, with strong resistance into the 0.7400-0.7500 area. As such, look for this most recent topside failure to produce a more pronounced bearish reversal, taking the market back down towards the 2017 low in the 0.6800s. Only a clear break back above 0.7500 would compromise the outlook, while back below 0.7200 strengthens the bearish case.
NZDUSD – fundamental overview
The New Zealand Dollar has finally pushed up to a fresh 2017 high, though the gains have been far less impressive than the gains of its Aussie cousin, as New Zealand data continues to underwhelm as evidenced by this week’s softer Kiwi inflation readings. But with the US Dollar getting hit hard across the board, with US equities at record highs and with commodities in recovery mode, all of this has more than offset any of the Kiwi negatives as far as its relationship with the US Dollar goes. Perhaps the slightly positive GDT auction result from Tuesday has also helped to give the Kiwi rate a bit more of a push. As far as the calendar for the remainder of the day goes, there is risk for early volatility on fallout from the Aussie employment data and the BOJ decision. Later in the day, the market will be watching equity markets, the ECB decision and US data that features initial jobless claims, the Philly Fed and leading indicators.
US SPX 500 – technical overview
Any setbacks have been exceptionally mild thus far and at a minimum, a daily close back below 2400 would be required to take the immediate pressure off the topside, though only a break below 2320 would signal a meaningful shift in the structure. Until then, the market is capable of extending the record run towards the next measured move extension target at 2480 further up.
US SPX 500 – fundamental overview
The US equity market has done a good job proving it can hold up into any dip and can keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on forward guidance. Janet Yellen played right into the market’s hand last week, when the Fed Chair’s overall tone was quite a departure from recent messages since the June Fed meeting. Yellen was decidedly less hawkish, expressing upgraded concerns about low inflation, while also adding rates would only need to go a little higher before policy was at a neutral level. At this point, it might not be enough to completely remove hawkish prospects, though it’s clearly inviting additional record high demand.
GOLD (SPOT) – technical overview
Setbacks have been well supported ahead of 1200, with the latest push back above 1230 setting the stage for a bullish resumption towards 1300. Only below 1200 would 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 exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity supported around 1200, 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. Certainly the US Dollar under pressure in 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, GOLD will hold up on risk off macro implications.
Feature – technical overview
USDZARÂ is showing signs of the formation of a meaningful base since bottoming out around 12.30 earlier this year. A recent push back above 13.00 strengthens this outlook and sets the stage for a continuation of gains towards next key resistance at 13.71 further up. Any setbacks should ideally be well supported ahead of 12.55, with only a break back below this level to negate the constructive outlook.
Feature – fundamental overview
The Rand has been given a break from all the political and economic turmoil that had been weighing on the currency, instead benefiting from a fresh wave of broad based US Dollar selling and demand for risk assets in the aftermath of a decidedly less hawkish Yellen testimony, softer US data and a US administration that is having a hard time getting anything done. Still, looking out, it’s hard to be too dismissive of the South African political uncertainty, including a never ending string of Zuma corruption charges. Throw in persisting South African recessionary forces, yield differentials shifting in favor of the major central banks and the still looming prospect for a material reversal in elevated global equities and it all points to the greater risk for additional Rand weakness going forward. Wednesday’s South Africa inflation data was mixed and hasn’t factored. Looking ahead, the SARB decision is due, though policy is expected to remain on hold.