USD Trading Outlook
Title: USD at a key inflection point, will multi month bull trend continue?
The FX market has been range bound past 24 hours with most majors seeing two way action. Exceptions are the GBP, gaining over 100pips following strong retail sales printing 1.2% m/m, and NZD driven by NZDUSD short covering and AUDNZD sellers.
The USD is at a key inflection point here. EURUSD bouncing from 1.105-1.11 level, previously the high on March and April and well supported in early May (previous resistance becoming support). AUDUSD is resting around 0.7900, previous highs on Feb and March and supported earlier in May as the basing ground before AUDUSD launched to 0.8160.
There are two contrasting views amongst FX traders:
- multi month bullish USD trend will continue, the USD was in extended pullback April and early May but medium term trend is intact and clear; US data will be strong and given the divergence of central bank policy (e.g. ECB front loading QE while US Fed hiking rate), Dollar index target above 100, EURUSD below 1.05, USDJPY breaking 2015 consolidation higher above 125, AUDUSD seek 0.75, Gold below 1140
- multi month USD rally is over and now predicting a weaker USD; this week’s correction was healthy; US data will continue to be weak, US Fed doesn’t want to jeopardise the economy so will hike rate much later; US Fed also doesn’t want strong USD to inhibit exports; EURUSD above 1.15, AUDUSD above 0.8150, Gold 1300.
The debate is ongoing and the flows of data and news will drive traders’ commitment to either side. Analysing price action around key levels may also assist in understanding the market’s conviction.
Tonight, we have four central bankers speaking: ECB Draghi, BOE Carney, BOJ Kuroda and US Fed Yellen (probably the highlight). US CPI is also a key indicator that US Fed looks at.
Trading Quote of the Day: “Risk means more things can happen than will happen.” - Elroy Dimson
No surprises from FOMC minutes with suggestion that June hike is off the table. Current market pricing of US Fed interest rate hike is Jun 6%, Sep 40%, Oct 63%, Dec 94%.
The question now is whether the USD bid this week is a correction of the USD sell off past two months or a continuation of the broader USD rally past year.
The market will continue to be data dependent and news driven. Tonight, we have ECB minutes, USD existing home sales, Philly Fed Manufacturing, ECB’s Draghi speaking amongst other events. Greece saga continues with deal deadline at the end of the month.
Trading Quote of the Day: “There is nothing wrong with changing a plan when the situation has changed.” –Seneca
USD has recovered significant ground that was lost last 2 weeks. The EURUSD pair was hit by all sides, as initially the pair slid below 1.12 on comments from an ECB official that the ECB is ready to accelerate Bond Purchases for seasonal reasons. He also mentioned negative deposit rates. Also, bad ZEW figures for Germany weighed on the common currency. The USD was widely supported also by the unexpectedly good US housing data. Today the Fed will release minutes of its April meeting. It is not expected the central bank is to signal a June rate hike, but once again say that all will depend on the economic data.
Weak inflation readings in the UK (inflation now negative for first time in more than 50 years) and USD strength, weighed on the GBP which fell to 1.5445 before bouncing back above 1.5500 again. Resistance is at 1.5535.
USDJPY has returned from hibernation. Good US and strong Japan GDP has brought the pair back close to 121.00 so this one will certainly be a pair to watch from now on.
Elsewhere, not much action in the AUD which remains under pressure from the RBA comments that rates may be cut further.
Overall, as mentioned before, the market is completely data dependent. Good US data will likely lead to a stronger USD, weak data, to a weak USD. Keep an eye on BoE and FED minutes today but also German PPI, and US crude oil inventories if you like trading the black Gold
Trading Quote of the day: Don't try to buy at the bottom and sell at the top. It can't be done except by liars. (Bernard Baruch)
Mild USD strength has resumed in the FX markets, however demand for the greenback remains subdued. Yesterday we saw EURUSD under pressure on speculation that Greece will not be able to repay its Debt to the IMF in June. As a result the common currency broke 1.1300, only for a while though. The lack of macroeconomic indicators didn’t give further boost to the reversal of the last week’s trend. This is Likely to change today though, as the calendar is busier with German ZEW and EU inflation data to be released at 09:00 GMT.
A little earlier, UK will release inflation data at 08:30, including PPI and CPI figures for April. The pair has been on an upwards trend after the general elections, however the rally has lost steam in the last 2 days. GBPUSD has fallen from 1.5814 to 1.5660 at time of writing. Technical indicators suggest that the pair may extend its decline down to 1.5540, especially should the data disappoint.
A combination of USD demand and RBA deputy member stating that there is still further scope to lower rates if needed, was reason enough for the AUDUSD to extend its decline, by breaking the 0.8000 level. As with most other major currencies, technically the pair is expected to be pressured and could head towards 0.7940 support before setting a new direction.
GOLD jumped higher up to 1231 yesterday however the metal is trading at 1222 just before the start of the European session. Critical resistance at 1233 with support levels at 1210 and 1200 in extension.
Trading quote of the Day: “Risk comes from not knowing what you’re doing.”
The FX market remains driven by the Fed’s rate hike expectations: last week’s data disappointed, pulling the US dollar down as traders’ expectations for a rate hike have also cooled down. The prospect of a possible June rate hike, might be finally put to rest as a series of disappointing economic data suggest that Q2 growth, is less impressive than hoped for.
As a result the USD is under enormous pressure against its counterparts. EURUSD ended the week near a 3 month high at 1.1466 (1.1440 at time of writing). Should the price advance beyond the mentioned daily high, there's scope for a test of the 1.1530 price zone, February monthly high. Support comes at 1.1320.
GBPUSD has cooled off its vicious advance following the UK elections. However the demand for Sterling is still high, despite Friday’s corrective move. Further direction will be data dependent, as UK releases the latest BoE minutes as well as CPI and retail sales. It is widely anticipated that policymakers voted unanimously to keep the Bank rate and the asset purchase program unchanged. 1.5818 remains the recent high as well as the critical resistance that will fuel bull’s confidence.
AUDUSD and NZDUSD opened the week lower. RBA deputy governor Philip Lowe said in a forum that the central bank still has "scope to lower interest rates" if needed. Market focus turns to RBA minutes to be released tomorrow.
On the commodity front, Gold just erased a previous one month high, and reached 1230 per ounce.
Trading Quote of the day: Risk varies inversely with knowledge. (Irving Fisher)
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