US Dollar Fundamental Outlook – USD Can’t Find Direction; GDP Data In Focus This Week
The US Dollar had a mixed week of trading. It was sold sharply on some days and rose strongly on others, and in the end, the Dollar Index managed to close the week higher than where it opened.
A rate cut by the Fed at their meeting at the end of this month is widely expected and nearly fully priced in by the markets. The retail sales data that was released last week was solid which eases off some pressure on the Fed to cut rates more aggressively. In the week ahead of us, the main focus from US data will be on the advance GDP report and on the Durable Goods data.
Going into the July 31 Fed meeting, USD Forex traders will care mostly about the degree of easing that the Fed will need to provide, assuming that a 0.25% rate cut is fully expected at this meeting. If the Fed leans toward no more rate cuts after that then the US Dollar can rise strongly. If, on the other hand, Fed officials communicate that more rate cuts will be needed this year, the Dollar can also fall substantially.
Euro Fundamental Outlook – EUR Down On Expectations For ECB Easing
The Euro currency was hit last week on reports that the ECB is considering to reassess their inflation target amid persistently low inflation. As for the Fed, the market expectations for an ECB rate hike also climbed significantly in recent weeks and that pressures the Euro to the downside as it did the Dollar in the Fed’s case from several weeks ago.
Now investors are expecting new monetary easing from the European Central Bank, via rate cuts and a renewal of the Quantitative Easing program that the ECB stopped only last year. The ECB meets on Thursday and will be the main event that Forex traders watch this week. President Draghi will probably use the opportunity to prepare the markets for monetary easing as early as September.
Thus, the Euro is unlikely to find much support in the week ahead either. All in all, the overall weakness in the major currencies continues with all major central banks now turning to “easing mode”. The EURUSD pair stays in the old ranges as a result, and it’s difficult to see how it can break out as long as both the Fed and the ECB are easing and devaluing their currencies.
EURUSD Technical Outlook:
The weekly trading range for EURUSD was below 100 pips for the second week in a row. Low volatility during the summer months is not something unusual for Forex traders as many of them are off for the holidays, but in this case, volatility has been at record-low levels for months. This just shows that Forex pairs are probably not ready yet for more active action, but once volatility spikes we will likely see some big breakouts in the Forex market.
At the start of the new trading week, EURUSD is testing the 1.1200 support area and it seems that a rising channel has been formed. The support trendline is around the same 1.1200 area while the resistance trendline of this channel goes toward 1.1500. In essence, this keeps EURUSD in its tight 1.12 – 1.15 range in which it’s been trading since the start of the year.
If a bullish signal is confirmed near 1.1200, then good bullish opportunities may be provided toward the 1.15 resistance.
British Pound Fundamental Outlook – GBP Can’t Find A Bottom
Pound Sterling continues to have a difficult time trading, and GBP extended the record-long slide versus the Euro and other currencies last week.
Not much changed over the past week on the UK political front and hence GBP didn’t move much either. Boris Johnson, the most likely person to succeed Theresa May as the new Prime Minister of the UK, has communicated several times already that he is not interested in extending the Brexit deadline beyond October 31.
This stance takes the UK in the direction toward a no-deal Brexit, a UK general election and overall chaos. Hence, the Pound will not find a bottom until there is more clarity on the UK political and Brexit outlook in a positive direction. Whether and how that might happen remain highly uncertain and unpredictable.
The Forex calendar for GBP is quiet for the week ahead.
GBPUSD Technical Outlook:
GBPUSD continues to trade near the 1.2500 level – testing this big support area. The pair traded mixed over the last week, first falling to fresh lows for this year but then rebounded to end the week just a few pips below 1.2500.
Strong resistance on the daily timeframe is now found in the 1.2700 price zone and GBPUSD will need to complete a strong breakout above it to confirm the 1.2500 weekly/monthly support. In such a case, the road toward 1.3000, the next resistance higher, will be cleared.
Nonetheless, for the moment, the risks of GBPUSD breaking below the 1.2500 support remain high and that is what Forex traders are focused on. If the support breaks, then GBPUSD could head to 1.2000 which is the next big support lower.
Japanese Yen Fundamental Outlook – JPY Patiently Watching Risk-on Risk-Off
As normal in recent times, the Japanese Yen continued to follow developments globally and in major economies. The currency remains supported in an environment of increased political tensions and higher risks for a big economic crisis.
Last week, geopolitical tensions were ignited after Iran seized a UK oil tanker. The situation has not escalated further but confirms the narrative that relations between global powers are worsening and geopolitical conflict is rising. In the meantime, stocks also finished the past week lower, and that kept risk-off assets such as Gold and JPY supported.
Similar factors and what is happening with other currencies will drive the JPY in the week ahead as well.
USDJPY Technical Outlook:
In our weekly analysis last week, we outlined that USDJPY may have formed a trading range between 107.00 and 109.00. So far, it seems that the pair is following the script correctly as the bearish attempt last week was rejected near the 107.00 support zone.
USDJPY is now trading near 108.00 which is kind of a “no man's land” for the pair given that resistance will be met at 109.00 and 110.00 Hence current levels are unlikely to provide interesting trading opportunities and traders are better off to look for buying/selling opportunities near the extremes of the range and near the support/resistance zones.
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