US Dollar Fundamental Outlook – Furious Trump Slams Fed And China (And Dollar Also)
Last week was quiet for the most part until the last few hours of trading when a series of events rattled markets and flushed risky assets.
It wasn’t the highly anticipated Powell speech at Jackson Hole that got markets moving. Instead, it was President Trump’s tweets and actions – escalating the trade war - and then a response by China, which sank US Stock markets and crushed the Dollar.
Trump slammed the Fed Chairman and China’s President Xi as being enemies of the United States. He also targeted the Dollar as being too strong, and this heated expectations that he may instruct the US Treasury to take specific actions to weaken the currency (such as intervention). Although intervention to devalue the Dollar is highly unlikely to work, the fact that the US President wants a weaker Dollar has scared off investors for now.
The week ahead is rather quiet with no major market-moving events scheduled on the calendar. Hence, the memories from last week are still fresh, and the path of least resistant for the Dollar will be lower.
Euro Fundamental Outlook – EUR Can Take A Sigh Of Relief For Now
The Euro fared well over the last week but mainly because of the falling Dollar rather than specific Euro strength. Most of the PMIs that were released showed some general improvement though that is extremely modest to be significant yet as the manufacturing numbers are still in recession territory.
Focus this week will turn to Preliminary German CPI and to the flash CPI inflation report for the whole Eurozone. Investors and the ECB are closely watching European inflation data, but there are rarely big surprises in the actual releases compared to the forecasts, so market reactions are usually muted. To some extent, also Brexit negotiations could be important for the Euro this week; if some progress is achieved that could help the single currency to rise.
All in all, with the ECB expected to provide ample monetary stimulus as soon as next month, the Euro will likely stay on the weak side on a broad basis (though EURUSD could still head higher due to USD weakness).
EURUSD Technical Outlook:
EURUSD’s powerful rebound last Friday took the pair above the 1.1100 handle and at the same time formed a tall bullish engulfing candlestick pattern on the daily timeframe. While we can’t say a longer-term low has been put in place with this, it certainly looks like a short-term bottom is behind us.
The strong bounce off the Friday lows suggests further upside in EURUSD is likely this week, which can take the pair to the 1.1200 area again. Resistance here will not be easily broken and EURUSD may as well just reverse and stay in a range between the 1.1050 lows and the 1.1200 resistance.
British Pound Fundamental Outlook – Merkel And Macron Breathe Life Into GBP
Hopes for a positive Brexit resolution were revived last week after UK Prime Minister met with German and French leaders, Merkel and Macron. The leaders said that a deal and a solution to Brexit is still possible before the October 31 deadline.
UK MPs who are against leaving the EU without a deal also stated last week that they would start a process in Parliament to stop a “no-deal” Brexit under any circumstance. This also helped GBP to recover further last week.
The Pound gained on the hopes that a no-deal Brexit will be avoided. Further fueling of these hopes this week would easily take the Pound higher in a situation when most investors have been pessimistic on the matter and when the Pound is so deeply oversold.
GBPUSD Technical Outlook:
The weekly bullish engulfing candle that we noted in our analysis last week seems to have worked and GBPUSD was able to extend the bullish move.
The pair is now very close to the 1.2300 price area that we also discussed as being an important resistance because it is the 38.2% Fibonacci retracement of the June-August GBPUSD bearish leg. If this resistance is broken then GBPUSD can continue higher toward the 1.2500 where it will meet stronger and more significant resistance.
To the downside, the main supported remains pinned at 1.2000 while moderate support could exist around the 1.2150 level.
Japanese Yen Fundamental Outlook – US-China Trade War Escalates; Sets Off Another Risk-Off Wave
It’s no surprise to anyone that the Japanese Yen was the strongest currency last Friday when a series of risk-off events hit markets. It seems that things are only going from bad to worse in the US-China trade war and last week’s escalation is only another proof of that.
More gains will be on the cards for the Yen this week if the risk-averse mood persists and that will be especially the case if stock markets continue to fall also. Furthermore, the weakening outlook for the global economy adds further bullish pressures to safe-haven assets and currencies like JPY. With the Fed and the ECB pressured to provide easing, the Yen seems well-positioned to gain versus the USD and the Euro from this perspective as well.
Nonetheless, uncertainty is high in the Brexit and US-China talks. The direction of negotiations can change quickly, as we’ve seen many times in the past, and that can then quickly change trends on JPY.
USDJPY Technical Outlook:
USDJPY would have spent the whole past week in a tight 50-pip range, between 106.20 and 106.70, if it wasn’t for Friday’s late afternoon breakout, which took the pair down by 150 in only 3-4 hours.
However, the big drop didn’t do much to alter the technical picture on the charts. The price is still between the big 105.00 support and the 107.00 resistance, so the pair could also spend this week in a tight range. The 105.00 support won’t be broken easily and it will be no surprise if we see USDJPY closer to 107.00 than to 105.00 at the end of this week.
On the other hand, if the bears manage to break through 105.00, then the road to 100.00 will be largely clear of support zones. In this case, 100.00 could easily be the next destination for USDJPY in the coming weeks.
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