Today’s report: US Dollar Still Vulnerable Post ECB
Thursday’s ECB event risk is behind us and although the Euro suffered in the aftermath, the setbacks were marginal and the central bank did not let down our expectation that it would lean to the more downbeat, dovish side of things. Looking ahead, Friday’s calendar is light and will the focus on bigger picture macro themes.
Wake-up call
- downbeat message
- BOE Haldane
- bigger picture
- policy strategy
- China developments
- OIL activity
- Cross related
- Fed model
- Hard asset
- Bitcoin outlook
- Demand expected
Peformance chart: 5-Day Performance v. US dollar
Suggested reading
- Give the BOJ a Break D. Moss, Bloomberg (January 24, 2019)
- Should We Be Afraid of AI?, D. Eagleman, Financial Times (January 24, 2019)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Despite the latest round of setbacks, the market looks to be in the process of carving out a meaningful base off the multi-year low from 2017, with a higher low sought out ahead of the next major upside extension back towards and through the +3 year high from 2018 around 1.2550. Look for the major pair to continue to be well supported on dips into the 1.1300 area, with only a break back below the 2018 low around 1.1215 to compromise the outlook.
EURUSD – fundamental overview
The expectation heading into the ECB decision was that the central bank would be painting a picture that was more downbeat and more dovish. This is exactly what we got from Draghi and the Euro pulled back as a consequence. The added drag of another round of softer Eurozone PMIs earlier in the day didn’t help the Euro’s cause either. Still, there continues to be quite a bit of demand for the Euro into dips, with bigger players looking to position for Euro upside in the weeks and months ahead on the back of soft Dollar fundamentals that should ultimately play a bigger role as far as influence on direction goes. Looking ahead, Friday’s calendar is light, with only German IFO readings standing out. US data has been pushed off due to the record long US government shutdown.
EURUSD – Technical charts in detail
GBPUSD – technical overview
We view the pullback in 2018 as a correction within a developing uptrend off the 2016 low and will be looking for a higher low to carve out well ahead of 1.1840, in favour of a push back to the topside. For this to play out, the market will ideally need to hold above some meaningful support in the 1.2300s and recover back through the September 2018 peak at 1.3300. The recent break back above 1.3000 helps to strengthen the bullish prospect. Next short-term resistance is up at 1.3175.
GBPUSD – fundamental overview
Despite ongoing uncertainty, odds for a no-deal Brexit scenario have been reduced significantly over the past week and this has helped to inspire tail risk position squaring and overall outperformance. There is now a growing expectation the Article 50 trigger date will be pushed back, if Theresa May is unsuccessful with her Plan B attempt. The Pound has also been helped along by some hawkish leaning BOE Haldane comments and this week’s impressive UK employment report, which produced a healthy jump in the earnings component. Looking at Friday’s calendar, the market will continue to monitor the Brexit updates, while taking in UK mortgage approvals and CBI distributive trades. There won’t be any first tier data out of the US, on account of the US government shutdown.
GBPUSD – Technical charts in detail
USDJPY – technical overview
The major pair is in the process of consolidating the latest round of declines within a bigger picture downtrend. Look for any recovery rallies to be well capped ahead of 111.00 in favour of the next major downside extension below the 104.63, 2018 low. This would expose a very important psychological barrier at 100.00 further down.
USDJPY – fundamental overview
The major pair will continue to track along with risk sentiment. After benefiting from the rebound in the previous week, the market could be getting ready to roll back over again, with discouraging trade comments from US commerce secretary Ross perhaps acting as a bit of a trigger for such a move. Ross was out saying the market shouldn’t be expecting any solutions on trade any time soon. Looking ahead, the major pair should continue to track with risk sentiment and will be focused on the bigger picture themes which include the US political drama, global trade tension and the state of the equities markets into 2019, with investors a lot more vulnerable to downside risk, now that government stimulus and central bank accommodation efforts have been exhausted. Earlier this week, the Bank of Japan was out with its latest decision, which produced an as expected result. The central bank left policy unchanged, cut its inflation outlook, and conceded downside risks to both the economy and inflation had increased.
EURCHF – technical overview
The market has been in the process of consolidating off the 2018 low, which coincided with critical support in the 1.1200 area. However, at this stage, there is no clear directional bias, with the price action deferring to a neutral state. Back above 1.1500 would get some bullish momentum going for a push to 1.2000, while back below 1.1185 would be quite bearish.
EURCHF – fundamental overview
The SNB remains uncomfortable with Franc appreciation and continues to remind the market it will need to be careful about any attempts at trying to force an appreciation in the currency. But the SNB will also need to be careful right now, as its strategy to weaken the Franc is facing headwinds from a less certain global outlook. Any signs of sustained risk liquidation in 2019, will likely invite a very large wave of demand for the Franc that will put the SNB in the more challenging position of needing to back up its talk with action, that ultimately, may not prove to be as effective as it once was, given where we’re at in the monetary policy cycle.
AUDUSD – technical overview
Despite the recent breakdown below the 2016 low, inability to establish below that low (around 0.6825), will keep the market from wanting to get overly bearish and could even warn of some form of a longer-term base. However, a drop back below the 2016 low again, would expose deeper setbacks towards the 2008 low around 0.6000. As far as the topside goes,the market would need to break back above 0.7400 to force a bullish shift in the structure.
AUDUSD – fundamental overview
There’s been a wave of relative underperformance in the Australian Dollar this week, with a lot of this coming from Thursday price action. Indeed, the headline Aussie employment readings were solid relative to expectation. However, the data was misleading, as most of the jobs came out of the part time sector. This was also accompanied by a dip in the participation rate. Other weighing factors have included NAB’s announcement that it would raise variable mortgage rates and some renewed downside pressure in equities. Comments from US commerce secretary Ross that the market shouldn’t be expecting any solutions on trade any time soon, have also been an Aussie negative in light of the impact on risk appetite and Aussie’s correlation to China.
USDCAD – technical overview
A period of intense correction has kicked in after a run to its highest levels since May 2017. Overall, the structure remains constructive, with dips expected to be well supported ahead of 1.3000 for renewed upside. Only back below the psychological barrier would compromise this view.
USDCAD – fundamental overview
The Canadian Dollar has been giving back some of its recent run of gains, with this week’s softer Canada retail sales print only contributing further to the price action. The Loonie had put in an impressive recovery run off the 2018 low against the Buck, getting a big boost from the recovery in OIL and a more balanced Bank of Canada outlook. Looking at today’s calendar, absence of first tier data out of Canada and the US will leave the market focused on the price of OIL and bigger picture macro themes.
NZDUSD – technical overview
While the bigger picture outlook still shows the market in a downtrend, as per the weekly chart, there’s a case to be made for a meaningful low in place at 0.6425. As such, look for the latest setbacks to be well supported ahead of 0.6500 in anticipation of additional upside, with only a break back below 0.6500 to put the focus back on the multi-month low from October at 0.6425. A break back above 0.6970 will strengthen the constructive outlook.
NZDUSD – fundamental overview
The New Zealand Dollar has been holding up well despite ongoing vulnerability associated with the risk correlated commodity currency and this latest dip in New Zealand credit card spending. A lot of this is a function of a rebound in US equities and cross related demand from fallout in the Australian Dollar post Thursday’s deceptively downbeat Aussie employment data. Looking ahead, absence of first tier data for the remainder of the day will leave Kiwi focused on bigger picture themes.
US SPX 500 – technical overview
There have been legitimate signs of a major longer term top, with deeper setbacks projected in the months ahead. Any rallies should now continue to be very well capped ahead of 2800, in favour of renewed weakness that targets an eventual retest of strong longer-term resistance turned support in the form of the 2015 high at 2140. The projection is based off a measured move extension derived from the previous 2018 low from February to the record high move.
US SPX 500 – fundamental overview
Investor immunity to downside risk is not as strong into 2019. The lag effect of Fed policy normalisation, US protectionism, ongoing White House drama and geopolitical tension are all warning of deeper setbacks ahead. The Fed has also finally acknowledged inflation no longer running below target, something that could very well result in even less attractive equity market valuations this year, given the implication on rates. We recommend keeping a much closer eye on the equities to ten year yield comparative going forward, as the movement here is something that will continue to stress the market in 2019.
GOLD (SPOT) – technical overview
There are signs that we could be seeing the formation of a more significant medium to longer-term structural shift that would be confirmed if this latest recovery can extend back through big resistance in the form of the 2016 high at 1375. Look for setbacks to be well supported ahead of 1200, with only a close back below 1200 to compromise the constructive outlook. Next key resistance comes in at the 1300 psychological barrier.
GOLD (SPOT) – fundamental overview
The yellow metal continues to be well supported on dips with solid demand from medium and longer-term accounts. These players are more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and trade war threats. All of this should 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.
BTCUSD – technical overview
At this stage, any upside moves are classified as corrective ahead of what could be the next downside extension and bearish continuation. It would take a break back above previous support in the 6,000 area to take the pressure off the downside. Next critical support comes in the form of the July and September 2017 lows, around 2,000 and 2,975 respectively.
BTCUSD – fundamental overview
Bitcoin has just gone through a tough 2018, with the cryptocurrency suffering on a number of fronts. Still, overall, the cryptocurrency and the technology it rests on continue to show a lot of potential looking out and we expect the market will regain composure over the medium to longer term.
BTCUSD – Technical charts in detail
ETHUSD – technical overview
The latest recovery rally has stalled out into a meaningful previous support zone, to keep the pressure on the downside, with risk for a bearish continuation to next critical support in the 50-75 area. At this point, it would take a sustained break back above 167 to take the immediate pressure off the downside.
ETHUSD – fundamental overview
We’re coming off a year of dramatic weakness in the price of Ether in 2018 and the cryptocurrency continues to face headwinds into 2019. Ongoing regulatory challenges and a global economic downturn are some of those headwinds that need to be considered. At the same time, longer term prospects are looking quite bright and valuations are increasingly attractive. There is a lot of demand for Ether that has been reported below 100 and ahead of 50.