US Dollar Fundamental Outlook – Now Is the Fed’s Turn; Will A Rate Cut Be Enough To Take USD Down?
The recovery of risky assets recently, and especially last week, seems to have hurt, not only the conventional “pure” safe-havens such as Gold or JPY, but the Dollar also.
Nonetheless, the USD is still near its 2-year highs, and there are no immediate reasons for it to decline further from here in the near-term. The CPI inflation and retail sales data that was released over the past week showed that core inflation rose more than expected as did consumer spending.
Part of the reason for the sharp USD reversal last week may also have to do with the Fed meeting which will take place this Wednesday. The US central bank is expected to cut interest rates, some economists even going as far as forecasting a 50bp rate cut. If the Fed is overly dovish, and perhaps even meets these extreme forecasts for a 50bp rate reduction, then the Dollar would likely take another sharp bearish leg lower.
However, the improvements in US economic data recently don’t warrant such a large rate cut or strong dovish guidance from the Fed. Hence, it will be no surprise if the Dollar strengthens again shall the Fed cuts rates only by 25bp and disappoints USD bears. Indeed, such price action would be consistent with the gradual USD bull trend that is predominant over the past 12 months or so.
Euro Fundamental Outlook – EUR Higher Despite ECB Rate Cut and QE Relaunch!
The ECB delivered the much anticipated and much-needed monetary stimulus last week. The second most important central bank in the world cut interest rates by 10bp, to -0.50%, and relaunched the asset purchase program (QE) at a pace of 20 billion euros per month with no defined time limit for when purchases will end.
However, the details of their decisions seem to have disappointed some. As a result, the Euro was able to recover all of the losses on the very same day and even close higher than where it was before the ECB announcement. Some of the reasons behind the sharp EUR reversal are related to the fact that the ECB decisions last Thursday were not unanimous, and in fact, were strongly opposed and voted down by the camp of “hawks” in the Governing Council. Further, the size of the QE was also disappointing for some of the loftier expectations for 40 billion per month or more.
Nonetheless, the Eurozone economy remains on shaky ground and will likely need additional stimulus later down the road. Hence, the rebound in the Euro is unlikely to be followed by further strong bullish price action, at least for now.
The calendar for the week ahead is light with only the German ZEW on Tuesday and Final CPI data on Wednesday.
EURUSD Technical Outlook:
EURUSD revisited the 1.0925 lows last week and quickly rebounded on the same day – reversed all the losses and closed the week in the green.
At the start of this new week, the pair is now also trading above the 1.1000 psychological level, which is often regarded as a critical watermark for EURUSD. However, resistance from the newly formed channel (best seen on the daily chart) stands at the 1.1100 price zone. Until this resistance is cleared, the gradual downtrend won’t be broken. Hence EURUSD could easily make another bearish attempt this week if the resistance holds.
To the downside, the 1.1000 area is now even more important from the weekly perspective, given that the pair was not able to close below this level on a weekly basis. The rebound last week only strengthens this 1.1000 support area. With resistance at 1.1100 and support at 1.1000, it will be interesting to see which way EURUSD goes over the coming weeks.
British Pound Fundamental Outlook – Brexit Hopes Drive GBP higher, But Further Gains May Not Come Easily
The Pound surged higher Friday on reports that the pro-Brexit Government of Boris Johnson might be starting to look for ways to deliver a softer Brexit after Parliament ruled out no-deal Brexit by law. However, the stories are just speculation, and the reality is that there is still no tangible proof that things are moving in a “soft Brexit” direction. The Pound would, therefore, likely continue to be highly volatile and swing in both directions on Brexit related news headlines.
Though economic data doesn’t matter much for GBP presently, last week’s reports were positive across the board, which may have provided a further boost for Sterling. This week, the calendar is even busier for GBP with CPI inflation, retail sales and the Bank of England meeting scheduled. However, GBP’s reaction to these events is likely to be muted again as the currency “cares” far more about Brexit than anything else now.
GBPUSD Technical Outlook:
As we said in our analysis last week, once the bulls break through the 1.2300 resistance area, it won’t be hard for GBPUSD to reach the 1.2500 area also.
Indeed, GBPUSD is now only a few pips below 1.2500. However, further gains to the upside will become more difficult at this point because the resistance here is rock-solid. If it holds, then GBPUSD could revert back to the “old” 1.2300 zone which would now be support.
On the other hand, in case of another bullish breakout - this time above 1.2500 - the next resistance higher is at the 1.2700 zone. Above it, the major 1.3000 psychological area will be the next resistance in focus.
Japanese Yen Fundamental Outlook – Risk-On Mood Pushes JPY To Weakest Major Currency
The Japanese Yen was the weakest currency of the majors last week as the general rally in risky assets extended and hurt safe havens broadly. Stock markets rose, and the US S&P 500 closed near the all-time highs on Friday.
While reaching a definite solution to any of the ongoing major geopolitical issues remains far into the distance (mainly Brexit and trade wars), the fact that the worst has been avoided for now was enough for investors to trim down their bearish bets – weighing on JPY, Gold and other safe havens.
For the week ahead, the same factors will matter the most for the Yen. Additionally, the Bank of Japan meets on Thursday, although no big reaction in the markets or JPY is likely as the central bank is expected to keep monetary policy unchanged.
USDJPY Technical Outlook:
USDJPY broke through the 107.00 resistance and closed the last week above the 108.00 level.
The pair stopped at the 100-day moving average which presently sits at 108.10 and represents a minor resistance area near the 108.00 round number If USDJPY breaks above here, then there won’t be much additional resistance to stop the pair from reaching 109.00 too, which is an important resistance zone due to the previous highs and rejections there.
Above 109,00, the major resistance sits in the 110.00 area where the 55-week, 100-week, and 200-week moving averages are all clustered together between 110.00 and 110.50. To the downside, the nearest support will likely be at the 107.00 area (the former resistance).
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