US Dollar Fundamental Outlook – USD Strikes Back; Will The Fed Finally Kill The Rally?
The US Dollar hit back last week in a reality check on Fed rate cut expectations. Furthermore, investors again come to the realization that the US Dollar is still the “cleanest dirty shirt” of the major currencies and have reverted to Dollars as a result.
Positive revisions of past months retail sales data landed some specific support for the greenback as implied probabilities for Fed rate cuts declined. The week ahead is crucial with the Fed meeting scheduled for Wednesday. Patience is the likely message, but also their stance on future interest rates will be closely watched as the markets already price in two rate cuts till the end of this year.
If the Fed delivers on the dovish expectations, the Dollar will likely tumble, probably even more violently than on the Non-Farm Payrolls two weeks ago. However, if they keep their neutral to hawkish stance of “everything is OK, and we are patient,” then the USD would likely return in its modestly bullish ranges.
Euro Fundamental Outlook – Can EUR Resume The Move Higher?
The week ahead can be a deciding one for the Euro and the EURUSD pair as well.
ECB President Draghi will speak several times over the week at the economic forum in Portugal, and his comments regarding the economy or future monetary policy at the ECB can move markets.
On the data side, the German ZEW economic sentiment index will be out on Tuesday while Flash Services and Manufacturing PMI data will be released on Friday. There is potential for the Euro to resume its rally from two weeks ago If the economic data shows improvements and is stronger than what is expected.
EURUSD Technical Outlook:
In our analysis from last week, we noted the 1.1350 area as key near-term resistance due to the 200-day and 200-week moving averages, and EURUSD indeed wasn’t able to break through it in spite of the bullish breakout outside of the 10-months old wedge pattern.
However, the bullish breakout is not negated yet as EURUSD now attempts to retest the breakout point of the resistance trendline. Thus, the big support now is in the 1.1200 area and if it holds the bullish breakout of the wedge remains alive. If EURUSD pushes below it, and in particular, pushes below the 1.1100 lows, the technicals will turn very negative as the bullish breakout will be fake at that point which is usually a big negative sign.
British Pound Fundamental Outlook – GBP Vulnerable As Tory Party Leadership Contest Goes On
GBP recorded another week of decline as weak economic data, and political uncertainty weighed on the currency. GDP and Manufacturing Production disappointed by a big margin while the only positive was the stronger than expected rise in wages.
The Conservative party leadership contest is in the second official week, and Boris Johnson still looks like the most likely candidate to win. His stance on Brexit is that the UK must leave on October 31, with a deal or without a deal, and that is not helping the Pound either as it raises the chances of no deal Brexit.
CPI inflation and retail sales will be released this week, and the Bank of England meets on Thursday. Governor Mark Carney doesn’t have much to be hawkish or positive about at the moment, so GBP is unlikely to find much support from the BOE either this week.
GBPUSD Technical Outlook:
GBPUSD is still trading close to the broader 1.2500 weekly/monthly support area, but the bullish momentum has deteriorated since last week.
The pair is again near the May lows and could attack the December lows toward 1.2400 as well. The inverted head and shoulders pattern on the daily chart that we mentioned last week was not completed and is now 25 pips away from being canceled.
Overall, GBPUSD is at a support zone, but the pair looks heavy. A bearish breakout of 1.2500 could open the way toward the major 1.2000 lows.
Japanese Yen Fundamental Outlook – BOJ & FOMC Meetings Watched
The Yen remains stable for now as long as risk appetite is steady. The JPY remains vulnerable to excessive and sudden strength in times of risk aversion, and given that stocks markets and the global economic outlook are vulnerable to weakness in the current environment, JPY remains firm.
The Bank of Japan will meet only a few hours after the Fed, but the Fed meeting will be no less important for the Yen as will the BOJ meeting. The Fed decisions and forward guidance are closely watched and will affect the broader risk sentiment in markets and that subsequently will impact JPY. So, an overly dovish Fed that supports stock markets and risk sentiment could help to lift JPY pairs as well this week.
USDJPY Technical Outlook:
USDJPY remained stable last week and not much changed in the technical outlook. The 108.00 area around the lows is support while resistance is nearby at 109.00.
The bearish trend on the daily chart is still intact and won’t be challenged much until the 109.00 resistance is taken out. There are no bullish signs at this point either and the price action of the past two weeks looks as consolidation in a downtrend.
However, a strong bullish breakout above 109.00 and then 110.00 could reverse the trend and set off hefty bullish momentum for further upside price action.
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