US Dollar Fundamental Outlook – USD Remains The Best Among The Worst
Another week rolls by and it was another set of mixed economic data out of the US. Tensions regarding world trade subsided slightly over the past week; particularly US-China trade talks and the US-EU trade relationship are on a better foot at the start of this week after Donald Trump announced he will delay the planned auto tariffs on the EU for six months.
Nonetheless, although the good news on trade did manage to lift some of the more risky currencies higher, the US Dollar still ended the week higher as other domestic factors keep these currencies pressured to the downside. Thus the US Dollar continues to be the primary beneficiary of domestic problems that other developed nations face.
The USD calendar for this week is quiet with only the Core Durable Goods report, and a speech from Fed Chairman Powell scheduled for Friday and Tuesday. With this in mind, developments in other parts of the world and on the trade from (US-China, US-EU relations) will determine where Forex pairs and the US Dollar will trade.
Euro Fundamental Outlook – All Eyes On EU Parliamentary Election
After trading higher on the first day of the past week, the Euro trend switched to a downtrend versus the Dollar and the EURUSD currency pair ended the last week notably lower. Broadly, the Euro currency traded mixed – rising against some and falling against other major currencies.
Tangible, so-called “hard” data continues to hold up well compared to the sentiment based, so-called “soft” economic data. The CPI and GDP reports that were released last week were in line with, and, even slightly better than expectations. Though, the “soft data” like the German ZEW Economic Sentiment Index was again below expectations.
Although the Euro received a bump from Trump’s announcement to delay auto tariffs on EU countries, the initial positive reaction was quickly faded as investors turned their attention to domestic concerns. Namely, leaders of the populist Government Coalition in Italy said last week that they are ready to break the rules on the 3% deficit ceiling imposed by the EU if needed to lower unemployment.
Populist parties are on the rise going into the EU Parliamentary Election this weekend, and that sentiment could weigh on the Euro this week. The result of the Election can also then have a big impact on the currency at the market open of the next week.
The closely watched Flash Manufacturing and Services PMI reports will be released on Thursday and will be another big test for the Euro in the week ahead.
EURUSD Technical Outlook:
EURUSD is deadlocked on the weekly timeframe in what appears to be a bullish wedge pattern (indicated by the blue lines). The price continues to trade in tight ranges across all timeframes and price movements are highly unpredictable.
There is also the potential for EURUSD to continue lower with a bearish breakout and stay inside of a downward channel, though this scenario looks less likely than the potential for the wedge pattern to provide a bullish breakout.
The descending wedge pattern, like the one we are seeing on the EURUSD weekly chart, is by definition a bullish pattern as the slowing momentum of the bearish price action indicates underlying bullish pressures and an unwillingness of the bears to take the price lower. However, the bullish breakout of this pattern will not be confirmed until the resistance trendline is broken at the 1.1250 area.
British Pound Fundamental Outlook – GBP Losses Deepen As Cross-Party Talks Collapse Without Deal
GBP sentiment worsened further over the last week as cross-party talks ended without a deal with the two sides saying the differences between the two were too big to come to an agreement.
The limbo state for the Pound continued, and so did the bearish trend that started two months ago. It was reported last week that Prime Minister May is preparing a final Parliament vote on her Brexit deal for early June. She has pledged to resign if her deal fails to pass for the fourth time in which case, uncertainty for the UK outlook would increase even more as a “hard Brexit” will become a higher probability scenario.
The Unemployment Rate fell to a 45 year low last week, but that, of course, didn’t help the Pound in the face of increased Brexit uncertainty. CPI Inflation and Retail Sales data is set for release this week, and the Bank of England MPC will testify before the UK Parliament on Tuesday, but we can only expect a muted GBP reaction on those.
GBPUSD Technical Outlook:
GBPUSD fell sharply in the last week and closed near the lows on a tall red candle. The pair fell through the key 1.3000 psychological support and now reached the bottom end of the range that held the pair between 1.27 and 1.33 for the past ten months.
Support is strong here in the 1.2700 – 1.2800 area as there are two major lows from 2018 here, and hence, it will not be easy for the bears to break through this area. To the upside, resistance is now at 1.3000 (mid of the range) before the resistance at the top of the range around the 1.3300 area.
Japanese Yen Fundamental Outlook – JPY Reverses Gains As Trump Changes His Mind Again
The unpredictable character of the US President comes to light again, as by now, most traders and investors got used to.
Last week he decided it’s time to delay the planned tariffs on EU autos and he said that he is optimistic that a good trade deal with China will be reached. USDJPY is now again above 110.00 after flushing out the shorts below and clearing the stops around this level.
The Japanese Yen will remain most affected by these changes in risk sentiment and will trade accordingly. Given all the uncertainty and the difficulty in predicting or timing these political games, many traders switch to technical analysis which can be a more effective analytical tool for Forex traders in times like these.
USDJPY Technical Outlook:
USDJPY reached the 109.00 round number level and bounced off it last week. This further confirms the notion that paying attention to round number levels on the USDJPY pair can pay off in this environment, although the incredibly tight range here too makes it difficult to find attractive trading opportunities.
Now, the USDJPY pair is again above the 110.00 watermark. It is the first support before the 109.00 low from last week and the 108.00 support area. Looking to the upside, the first resistance is in the 111.00 area (55-week and 100-week moving averages) before the year to date highs at 112.00.
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