US Dollar Fundamental Outlook – Decent Wage Growth Confirms Strength In US Labor Market; USD Stays Bid
The focus for Fx traders over the last week was on US economic data which overall confirmed that the US economy remains in a relatively “healthier” state compared to Europe or other major economies. A general trend also evident in Europe was apparent in last week’s US data as well, and that is a weak manufacturing sector compared to a more resilient services sector.
The employment reports were also decent overall, with wage growth beating expectations and the participation rate rising while unemployment staying unchanged. So, although the Non-Farm Payrolls component was weaker than expected, the overall report is not indicative of a weak labor market – on the contrary, overall the reports show the labor market is quite healthy.
This would likely continue to support the US Dollar in the coming weeks as well, especially given that other major economies are on a weaker foot and risk aversion flows are also supportive for the “safe haven” USD. For this week, the focus on the calendar is on CPI inflation and retail sales, and if the data is strong the Dollar can easily embark on a new bullish leg higher.
Euro Fundamental Outlook – Crucial ECB Meeting On Thursday; Not Looking Bright For EUR Currency
The Euro followed GBP last week and was able to gain some ground on positive Brexit developments and the formation of a new government coalition in Italy which helped to resolve the recent political crisis there. However, how much the gains will last is up to the ECB now. Their meeting will be held on Thursday and traders are expecting big decisions and major changes in monetary policy.
The ECB is expected to announce new easing measures to stimulate growth and inflation in Eurozone countries. By now, a rate cut and a restart of QE is nearly fully priced in by markets, and the only question that remains is the size of the stimulus that the ECB will provide. This “expected vs actual measures” will in turn, be the main factor that will affect the EUR reaction in currency markets. However, this is very difficult to estimate ahead time and hence this ECB is likely to be a highly uncertain and volatile event to trade.
Although it is safe to say that the easiest path for EURUSD remains down, there is a chance that the ECB may surprise markets in which case the Euro could shoot higher. However, if things go as expected, we are likely to see EURUSD continue to drift lower over the coming weeks and perhaps toward the 1.0800 area versus the US Dollar.
EURUSD Technical Outlook:
The downtrend in EURUSD is firmly intact with the pair trading inside of a bearish channel on the daily timeframe. The rally last week was rejected at the 1.1050 resistance zone and since then EURUSD has been consolidating near that level.
The resistance trendline of the channel is the key technical level for the bearish trend and currently it near the 1.1100 round number level. For as long the price trades below this resistance trendline the trend will remain down.
To the downside, the first support is at the 1.0950 zone where the last bearish attempt was rejected. The next support comes at the support trendline of the channel toward the 1.0850 level. Assuming the bearish trend continues, this level would likely be reached.
British Pound Fundamental Outlook – GBP Soars As British Parliament Rules Out No-Deal Brexit
It seems that Parliament has won this battle with Prime Minister Boris Johnson, which was hugely positive for the GBP currency last week. The Parliament passed a law that effectively forces the Prime Minister to ask the EU for an extension of the October 31 Brexit deadline in order to avoid the cataclysmic no-deal Brexit scenario.
As we suggested in our week analysis last week, the Pound soared on the good Brexit news as the chances of a no-deal Brexit were reduced and priced out in markets. However, nothing is done here and high risks for a no-deal still remain on the table. So, those gains will not be sustainable much until a lasting and definitive solution to Brexit is found. That can’t happen for at least several weeks more as the main political parties in the UK are now trying to muster MPs support for new elections which are by now seen as the only way out of this political impasse.
Hence, for GBP trading will remain volatile and uncertain. No major economic data is scheduled on the calendar for this week, but the Brexit agenda will be busy.
GBPUSD Technical Outlook:
As we noted in our analysis posts from the past few weeks, GBPUSD was not going to breakthrough 1.2000 easily. Indeed, the pair bounced strongly there and is trading near the 1.2300 resistance area.
What makes this bounce more significant than the previous one from a few weeks ago is that now the price also broke the bearish channel as shown on the daily chart below. Resistance here at the 1.2300 area is provided by the 38.2% Fibonacci retracement and the 55-day moving average (blue line). A bullish breakout here probably would quickly take GBPUSD to the next important resistance zone at 1.2500.
The nearest but modest support is around 1.2150. The next support zone is the crucial technical area at 1.2000.
Japanese Yen Fundamental Outlook – A Sigh Of Relief For Risky Assets But Nothing Of Substance Yet; JPY Stays Attractive
Risk appetite was supported on the improvement of Brexit sentiment and rising stock markets last week. The US-China talks were resumed which was taken as a sign of relief for risk sentiment, although notable progress in the talks any time soon is not expected by nearly anyone.
As a result of the above, there was less demand for safe havens. The Yen was on the back foot, but partly also due to overbought conditions, given the broad appreciation of safe-haven assets and currencies over the past few months.
Nonetheless, the dominant mood is not broken and remains risk-averse overall. Nothing has been resolved sustainably on the Brexit or US-China front while the major economies remain in a fragile place. Hence, this should continue to keep the JPY firm. Things could quickly breakdown again and it will no surprise if we see another unexpected JPY surge.
USDJPY Technical Outlook:
The 105.00 – 107.00 potential trading range on USDJPY, that we discussed on a few occasions in our analysis from the past weeks, is now confirmed.
USDJPY is currently trading right at this 107.00 resistance level where a strong resistance zone is formed by the 55-daily moving average and the previous lows here from June and July. A break to the upside here will open the way toward the next key resistance zones higher which are standing at 109.00 and 110.00.
To the downside, 105.00 remains the major support area.
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