Special report: Fed Preview: Personnel Over Policy
Today’s report: Dollar Sliding Ahead of Yellen’s Last Decision
There wasn't much for the market to take from President Trump's State of the Union address and into Wednesday, it looks like we're back to those US Dollar outflows. Plenty of data to take in, followed by the anticipated FOMC decision.
Wake-up call
Chart talk: Major markets technical overview video
- Eurozone CPI
- BOE Carney
- BOJ Iwata
- Unusual outperformance
- softer inflation
- Canada GDP
- Cross related
- VIX rise
- Metal demand
- BITCOINÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Secret Brexit Paper: How the Numbers Compare, C. Giles, Financial Times (January 30, 2018)
- The China Default Everyone’s Waiting For, A. Mukherjee, Bloomberg (January 30, 2018)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The Euro has entered a period of consolidation off the recent 2018 high, though overall, the uptrend remains firmly intact and there is still room to run. The break of the 2017 high set up a bullish continuation and the next major measured move upside extension into the 1.2700 area, which coincides with monumental resistance in the form of a falling trend-line off the record high from 2008. In the interim, any setbacks should be very well supported ahead of 1.1900.
EURUSD – fundamental overview
President Trump’s State of the Union speech didn’t have any big market moving influence on the currency market and the focus was back to the bigger backdrop theme of broad based Dollar weakness on the US administrations soft Dollar policy objectives. There was mention of infrastructure spending plans, though this was already anticipated. The Euro seems to be technically driven as well right now, with the market pushing up towards a big area, in the form of falling trend-line resistance off the record high from 2008. There is quite a bit to take in today, with German retail sales, German unemployment, Eurozone unemployment, Eurozone CPI, US ADP, and US pending home sales due, before all eyes turn to Janet Yellen's last Fed decision.
GBPUSD – technical overview
Daily studies are in the process of unwinding from overbought levels. This in conjunction with the market reaching the measured move extension objective following the breakout above 1.3660, warns of either a period of consolidation with limited upside, or deeper setbacks over the coming sessions. But any setbacks are viewed as corrective, with the market now seen well supported into that previous resistance turned support in the form of the 2017 high at 1.3660.
GBPUSD – fundamental overview
A healthy recovery for the Pound of its recent low, with the market pushing back up on another wave of broad based US Dollar selling, and on comments from Bank of England Governor Mark Carney, who said the UK had ‘moved into a more conventional area for policy, where the focus was increasingly on returning inflation sustainably to target.’ There wasn’t much for the market to do with President Trump’s State of the Union address and the focus will now shift to today’s calendar. Absence of first tier data out of the UK will put the focus on any Brexit headlines and the US docket, which features US ADP, and US pending home sales, before all eyes turn to Janet Yellen's last Fed decision.
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 encourages this outlook, with the break back below 110.85 opening the door for an acceleration towards the 107.00-108.00 area range base in the sessions ahead. Look for any bounces to now be well capped ahead of 111.00.
USDJPY – fundamental overview
BOJ Iwata tried to cool the appreciation in the Yen on Wednesday, after saying the Yen was rising on a misunderstanding that easy policy will soon come to an end. Iwata went on to drive his point home, saying the 2% inflation target was still very far off. But these comments shouldn’t come as a surprise from Iwata, who’s policy leanings are known, and this hasn’t had much impact on the Yen. Overall, the Yen has been well bid in early 2018 despite rocketing US equities, and with stocks melting up, there are signs of capitulation on that front. This warns of even more Yen strength (USDJPY weakness) over the coming days, with a liquidation in risk correlated assets to inspire a flight back into the funding currency that is the Japanese Yen. The primary drivers of Yen demand thus far in 2018 have been broad based US Dollar weakness on soft US Dollar policy and some tweaking of BOJ policy that has the central bank moving a little further from its current super accommodative policy. Looking ahead, we get US ADP, and US pending home sales, before all eyes turn to Janet Yellen's last Fed decision. There was no big reaction to President Trump’s SOTU address.
EURCHF – technical overview
The market continues to trend higher, extending gains to a fresh multi-month high. The bullish price action has the market thinking about a retest 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. Last week’s outperformance in the Swiss Franc despite flows which should have otherwise been supportive of a higher EURCHF, could already be offering up a red flag.
AUDUSD – technical overview
An impressive recovery out from the December low is showing signs of exhaustion, with the market rolling over after clearing the 2017 high and stalling out. A daily close back below 0.7957 will strengthen this outlook and open the door for a renewed wave of declines, while at this point, only a daily close back above the 2017 high at 0.8136 would suggest the market wants to look to keep pushing higher.
AUDUSD – fundamental overview
Softer inflation readings out of Australia along with weaker China manufacturing PMIs, have resulted in some relative underperformance, though the currency continues to hold up against the Buck on the back of the broad based US Dollar outflow. Nevertheless, there is risk additional upside could be limited against the Dollar as well, with extended technical readings and a downturn in risk sentiment to invite a fresh round of offers. Looking ahead, we get US ADP, and US pending home sales, before all eyes turn to Janet Yellen's last Fed decision. There was no big reaction to President Trump’s SOTU address.
USDCAD – technical overview
Despite the latest round of setbacks, there are signs of basing in this pair, after the recovery from plus two year lows back in September extended through an important resistance point in the form of the August peak. This sets the stage for additional upside, with the next focus on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported above a critical 78.6% fib retrace at 1.2240 on a daily close basis. Back above 1.2509 will strengthen the outlook.
USDCAD – fundamental overview
Overall, Canada’s recovery is still somewhat fragile, and this coupled with an unstable macro picture and plenty of uncertainty around the fate of NAFTA, should be keeping the Canadian Dollar from wanting to run much higher, especially after the Bank of Canada opted to go ahead with another rate hike this month, which will only add to the strain if the global sentiment picture deteriorates. As far as today’s calendar goes, we get Canada GDP data along with US ADP, and US pending home sales, before all eyes turn to Janet Yellen's last Fed decision. There was no big reaction to President Trump’s SOTU address.
NZDUSD – technical overview
The market has done a good job recovering off the 2017 low from November, though additional upside could now be limited after overshooting a measured move objective in the 0.7200 area off an inverse head and shoulders formation. Overall, there is still medium term risk tilted to the downside and it will take a clear establishment back above 0.7400 to delay the bearish outlook and risk for another reversal. Look for a daily close back below 0.7200 to strengthen this outlook.
NZDUSD – fundamental overview
Most of the Kiwi strength over the past several weeks has been driven off broad based US Dollar weakness, record stocks and recovering commodities prices. But with US equities showing signs of rolling over, sentiment at risk of deteriorating, and the US Dollar recovering, it all could be warning of the start to renewed weakness. There has been an added bid on Thursday from cross related flow associated with AUDNZD selling on the back of softer Aussie inflation readings and weaker China manufacturing data. Looking ahead, we get US ADP, and US pending home sales, before all eyes turn to Janet Yellen's last Fed decision. There was no big reaction to President Trump’s SOTU address.
US SPX 500 – technical overview
The market continues to shrug off severely overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, medium and longer-term 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 2772 at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
The US equity market has pushed further into record high territory in early 2018, in a move that can only be described as a full on meltup. It seems, the combination of blind momentum, expectation US tax reform will ultimately work out well, excitement around infrastructure plans, a belief the Fed will remain super accommodative in light of a more dovish leaning incoming Fed Chair, and ongoing subdued inflation, 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 starts to rise from unnervingly depressed levels. And so, all of this coupled with 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 in 2017. At this point, it will take a breakdown in this market back below 2772 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 the current run to break through and establish above massive resistance in the form of the 2016 high at 1375, with the push to suggest a major bottom has formed, opening the door for a much larger recovery in the months ahead. Any setbacks should now be well supported ahead of 1300.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players persists, 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 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. The 2016 high at 1375 is a massive level that if broken and closed above, could be something that triggers a widespread panic and rush to accumulate more of the hard asset.
Feature – technical overview
Bitcoin has come under intense pressure since topping out at a record high just shy of 20,000 in December. The market had been in a period of consolidation in the aftermath of the record run, with most of that consolidation playing out between 12,000 and 17,000. The recent break below the consolidation low opens the door for an accelerated decline towards the next measured move extension target around November levels, in the 7,000 area.
Feature – fundamental overview
The crypto asset has come under intense pressure in early 2018, with ramped up regulatory oversight and potential government crackdowns forcing many holders to exit positions. The market has also been on a euphoric ride, with the run gaining too much momentum as latecomers look to get in on the action, often a sign of a bubbling asset. Bitcoin has struggled on the transaction side as well, with transactions per second a major drawback, along with a mining community that has been less willing to process transactions due to the lower fees. The Lightning network is expected to ramp up transaction speed as it is integrated, which could be a big help to Bitcoin, though it seems the combination of a massive bubble, more regulatory oversight and a market that is still trying to convince of its proof of concept, could be at risk for deeper setbacks. Throw in an extended global equities market at risk for its own capitulation and the picture looks even gloomier.