Next 24 hours: Euro Trying to Make A Statement
Today’s report: US Dollar Recovers….But Not Much
There haven't been too many sessions of US Dollar strength of late, and yet, that's what we got on Wednesday. However, the rally in the Buck was more a function of profit taking than anything else, with shorter term accounts looking to square up ahead of tomorrow's US employment report risk.
Wake-up call
Chart talk: Major markets technical overview video
- services PMIs
- consumer credit
- Fed Minutes
- SNB strategy
- elevated sentiment
- NAFTA risk
- GDT results
- Investor immunity
- Global uncertainty
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Euro Finds Favour With Traders, R. Blitz, Financial Times (January 3, 2018)
- Looking Into Crystal Ball – Ten Surprises for 2018, B. Wien, RCM (January 3, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Despite a prolonged period of sideways trade, the outlook for the major pair remains highly constructive. The door is now open for a more immediate resumption of a well defined uptrend that has taken form in 2017. Look for any setbacks to be well supported ahead of 1.1700, for the next major upside extension beyond the current yearly high of 1.2093 and towards the 1.2500 area further up. But ultimately, only a daily close back below 1.1550 will delay this outlook.
EURUSD – fundamental overview
The Euro was unable to take out the 2017 high on Wednesday, with short term profit taking kicking in ahead of tomorrow’s US employment report. Solid US ISM manufacturing and a Fed Minutes that kept with a more hawkish line also helped to keep the single currency weighed down, despite German unemployment dropping down to a record low. Looking ahead, we get some Eurozone services PMIs, along with US initial jobless claims and US ADP employment. Medium and longer term accounts continue to look to buy dips.
GBPUSD – technical overview
The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658. This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018. Any setbacks should now be well supported into previous range resistance now turned support in the 1.3300 area.
GBPUSD – fundamental overview
The UK currency came off on Wednesday after stalling out ahead of the 2017 high. Solid US ISM manufacturing, hawkish components within the Fed Minutes and profit taking ahead of tomorrow’s US employment report were all factors weighing on currencies across the board. However, the Pound's setbacks were more pronounced on Wednesday after UK construction PMIs came in on the soft side of expectation. Comments from Jim O’Neill didn't help the Pound's cause either, after the well known and well respected O’Neill suggested UK Brexiteers were clueless about the global economy, citing the cabinet’s fantasy approach to post Brexit trade. Looking ahead, we get some UK services PMIs, UK consumer credit, US initial jobless claims and US ADP employment.
USDJPY – technical overview
The major pair has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The latest topside failure off the range high strengthens this outlook, though the market will ideally need to break back down below 112.00 to strengthen this prospect.
USDJPY – fundamental overview
Into 2018, the Yen is trying to figure out whether it needs to be selling off on the ongoing bid in global risk assets and yield differentials that favour the Buck, as the Fed looks to continue with its policy normalisation, or if it needs to be rallying on the back of broad based US Dollar weakness and the possibility that an extended risk market could finally begin to capitulate. These are the big drivers that will dictate direction going forward. Into Thursday, USDJPY was bid up on the back of a US Dollar recovery from solid US data, hawkish components within the Fed Minutes, record high US equities and profit taking ahead of tomorrow’s US employment report. However, the gains haven’t been all that impressive considering, and with equities well extended, there could be room for another USDJPY decline ahead. As far as today’s docket goes, we get US initial jobless claims and ADP employment.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. The bullish break could now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for any setbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now as its strategy to weaken the Franc could face headwinds from the US equity market in 2018. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities. But any signs of capitulation on that front into this new year, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead.
AUDUSD – technical overview
Technical studies have turned back up over the past several days, with the market in the process of recovering after trading down to a fresh multi-day low around the 0.7500 barrier in December. Overall however, the pressure remains on the downside and additional upside could be difficult into solid internal resistance ahead of 0.8000.
AUDUSD – fundamental overview
The Australian Dollar has broken up to two multi-week, with the currency extending its recovery into 2018 and outperforming on the day. The combination of surging commodities prices, a broad based wave of US Dollar outflow, rallying iron ore prices and a more upbeat outlook for the Australian economy have been behind this week’s accelerated run of gains. Aussie has even been able to shrug off Wednesday’s mild US Dollar recovery from solid US data and hawkish components within the Fed Minutes. The record run in US equities has helped the correlated Aussie, while upbeat Aussie services PMIs have added to the bid into Thursday. Dealers are however starting to talk decent sell interest from medium term players. Looking ahead, we get US initial jobless claims and the US ADP employment report.
USDCAD – technical overview
Clear signs of basing in this pair, with the recovery from plus two year lows back in September extending through an important resistance point in the form of the August peak. This sets the stage for additional upside in the days and weeks ahead, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported ahead of 1.2500.
USDCAD – fundamental overview
The Canadian Dollar has been better bid of late on the back of some solid Canada data, this latest surge in the price of OIL, better bid commodities across the board and some broad based US Dollar outflows. The Loonie even managed to hold up well on Wednesday, despite the solid US economic data and hawkish components within the Fed Minutes. Nevertheless, in 2018, there is plenty of downside risk to the Loonie as the fate of NAFTA comes back into the spotlight, with any talk of a breakup to put more pressure on the Canadian Dollar. As far as today’s docket goes, we get Canada industrial product and raw materials prices, along with US ADP employment and US initial jobless claims.
NZDUSD – technical overview
The market is turning up after recently trading down to a fresh 2017 low in November. The price action has taken the form of a kind of inverse H&S pattern, with the break back above 0.6980 strengthening this prospect and opening the door for a more pronounced recovery into the 0.7200 area. For now, setbacks are expected to be supported ahead of 0.6850 to encourage the outlook.
NZDUSD – fundamental overview
The New Zealand Dollar has broken up to multi-week highs, with the currency extending its recovery off the 2017 low from November. The combination of surging commodities prices and a broad based wave of US Dollar outflow have been behind this accelerated run of gains. This week’s uptick in the GDT auction and some solid Kiwi manufacturing data have also helped the cause. Kiwi has even managed to hold up well on Wednesday, despite the solid US economic data and hawkish components within the Fed Minutes. Looking ahead, we get US initial jobless claims and US ADP employment.
US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, technical readings are tracking well overbought and are in desperate need for a period of healthy corrective action. Ultimately however, it will take a break back below 2652 at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips, pushing further into record high territory. It seems, on a macro level, the combination of blind momentum, expectation US tax reform will ultimately work out well in 2018, excitement around infrastructure plans and a belief the Fed will remain super accommodative under Jerome Powell are all factoring into the relentless bid. Nevertheless, investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reduction coming into play and the Fed finally following through with forward guidance erring on the side of policy normalisation. But for now, it’s more of the same, with the market shrugging off any red flags. At this point, it will take a breakdown in this market back below 2500 to turn heads.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs. Look for this most recent dip to round out that next meaningful base in favour of a bullish continuation towards a retest of the 2016 peak at 1375 further up. Ultimately, only a drop back below 1200 would negate the 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 well supported, 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 has added 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 for an extended period, GOLD will hold up on risk off macro implications. Dealers are now reporting demand in size ahead of 1200.
Feature – technical overview
USDTRY is in the process of correcting off the record highs in November to allow for extended studies to unwind. However, the uptrend remains firmly intact and a fresh higher low is now sought out ahead of the next big push through the massive psychological barrier in the form of the 4 handle. Ultimately, any setbacks should be well supported ahead of 3.6500, with only a break back below this level to delay the outlook.
Feature – fundamental overview
The CBRT did a fabulous job disappointing investor expectation for what was believed to be a much bigger adjustment to rates than the one the market got in December. The Turkish central bank opted to only raise by a modest 50bps in the LLW. This is viewed as a knock on CBRT credibility, with the central bank clearly influenced by the ongoing pressure from the Erdogan government to keep policy as loose as possible. The Lira could be poised for a fresh record low in the days ahead, with USDTRY considering a break of the massive psychological barrier at 4.00. The emergence of new stress in the global economy could add to the Lira strain if we see a global reduction in risk appetite that ultimately drags the entire emerging market space.