US Dollar Fundamental Outlook – USD Traders Focused On Powell’s Jackson Hole Speech
The US Dollar traded higher last week on a multitude of factors. First and foremost, the major bullish push came from US President Trump who unexpectedly announced last Tuesday that he will delay the planned tariffs on China. This reversed some of the heavy losses that the USD took due to the planned increase in tariffs and an escalation of the trade war which heated up expectations for aggressive easing from the Fed.
Traders and the Fed can now take a breather and reassess the whole situation. The Fed Chairman Jerome Powell will have a chance to do that this week when he will speak at the yearly Jackson Hole economic symposium. His speech will be closely watched for any signals he might send on future Fed policy.
Expectations for aggressive easing have receded last week and that was part of the reason that took the USD higher. Further, the US Dollar was supported due to weakness in other major currencies (e.g. the Euro). In the week ahead, traders will also keep an eye on the FOMC meeting minutes from the most recent Fed meeting.
Euro Fundamental Outlook – EUR Slides Further As German Recession Imminent
The Euro currency was hit with another dose of disappointing economic data last week and as a result, it was down again versus the USD and other currencies.
Namely, the German ZEW sentiment index hit the lowest reading (of -44.1) since December 2011 and is now deeply into recessionary territory. A recession in Germany, the largest EU economy looks now imminent with all sentiment survey indices showing the economy is headed south. This has additionally intensified the expectations for massive monetary policy easing to be provided by the ECB, either via cutting interest rates deeper into the negative or restarting the QE program. In either case, both scenarios are hugely bearish for the Euro.
In the week ahead, the main focus will be on the closely watched preliminary (flash) services and manufacturing PMI sentiment data. If the PMIs slide further (manufacturing PMIs are already below the 50.00 recession benchmark) then the Euro will have no problem to follow lower also.
Traders will also watch the CPI inflation data early in the week and the accounts of the most recent ECB monetary policy meeting, scheduled for release on Thursday.
EURUSD Technical Outlook:
The resistance at the 1.1200 area held last week and after the bullish attempt was rejected here, EURUSD continued lower as we expected in our analysis from last week.
The pair is now approaching the big support at the 1.10 area that we have also discussed many times here. From the current point of view, it seems that EURUSD will reach the 1.1000 level, but whether it will break it or not is an entirely different question.
While that is certainly possible, the support at 1.1000 is big, as can be seen from the chart below, and the previous bearish attempt was already rejected here a few weeks ago. Nonetheless, the price action and the bearish trend remain gradual so it would be difficult to pick breakout trades even in case if 1.1000 breaks. Hence, selling rallies at resistance may be a more appropriate strategy in such a situation.
British Pound Fundamental Outlook – GBP Rebounds On Solid Data, But Will It Last?
Pound Sterling recovered some of the recently incurred losses over the last week as the data that was released was mostly positive and beat the expectations. However, retail sales and inflation being strong in times when the currency is falling hard is not necessarily any good news and especially not because the Brexit standstill hasn’t moved one inch forward or backward.
The week ahead features no market-moving report or a specific event on the calendar and that means that it will be all about Brexit again. The new Prime Minister Johnson remains committed to taking the UK out of the EU on October 31 which means that the base case scenario at the moment is a “no-deal” exit - unless the Parliament does something to stop that.
In any case, the only thing that is certain for Forex traders is that GBP currency pairs will remain volatile and unstable in this context.
GBPUSD Technical Outlook:
After reaching the 1.20 support area GBPUSD used bounced here as selling interest receded in the face of this major support.
Interestingly, the price was also able to form a bullish engulfing pattern here, however, it does not look very convincing in the face of the steep downtrend before it, especially because it was formed on lower volatility and without a powerful rejection of the lows. Particularly, the two candles that form the bullish engulfing are rather small (about 150 pips tall) compared to the previous candles of the bearish trend.
Nonetheless, this bullish candle probably marks the beginning of a prolonged retracement at least. The nearest resistance to the upside is the 1.2300 price zone which is the 38.2% Fibonacci retracement of the bearish leg. The more important resistance is located slightly higher, at the 1.2500 price zone which is also the 61.8% Fibonacci retracement.
Japanese Yen Fundamental Outlook – Risk Aversion Eases As Trump Flips On China Tariffs; JPY Softens
The Japanese Yen was softer last week as Trump flipped again and said that he will delay the planned tariffs on China. Although the reason for delaying the tariffs was said to be helping US businesses, some further positive talk on the US-China front followed in the following days and that helped to recover risk sentiment.
Safe haven assets and currencies like the Yen immediately tumbled lower after the “tariff delay” announcement but there wasn’t much continuation of the risk-on price action. This suggests that investors are still not much certain that things can get better before they get worse again, so the overall tone in markets is still that of risk aversion.
Similar factors and primarily risk sentiment will continue to drive the JPY currency in the coming week as well.
USDJPY Technical Outlook:
USDJPY also bounced at the major 105.00 support area that we discussed on several occasions here in our weekly analysis blog posts.
A bullish candlestick pattern was also formed here on the weekly chart (piercing pattern) with a solid rejection of the bearish attempt at the lows. Now the main question is whether USDJPY can continue the rally or not. However, one thing is for sure and that is the strong resistance at the 107.00 price zone. As can be seen from the chart, several lows stand in this area and two bullish attempts (including last week’s) were already rejected here recently.
Thus, for USDJPY there are two pivotal price zones now – 105.00 as support and 107.00 as resistance. A break of either will open the way for further continuation in that direction.
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