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Video: Dollar, S&P 500 and Volatility Trends
FX traders have traded through a mine field of fundamental event risk. After the FOMC meet, Scotland 'No' vote and ECB stimulus injection; what trends prevail? Are there new bearings or are their lasting currents that are set to retake the reins moving forward? In this weekend Trading Video, we gauge the impact of this past week's fundamental developments and discuss how it can shape the currency and capital markets moving forward.
EURUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Euro: NeutralThe Euro tumbled to fresh lows versus the high-flying US Dollar on a week of bad news for Europe and much better developments out of the US. But why might the Euro/Dollar exchange rate be at risk of an important bounce?
Almost all traditional fundamental signals point to further Euro weakness, and yet we see clear warning signs that such news and sentiment may be overdone. Everyone is bearish at major market bottoms and bullish at the tops, and that in itself is an important trigger which favors some sort of Euro bounce. Beyond that, however, we see technical reasons why the US Dollar rally may be overdone.
High FX market volatility continued to drive the safe-haven US currency higher across the board as the combination of a US Federal Reserve Meeting, key European Central Bank results, and the highly-anticipated Scotland independence referendum fueled major moves. Yet the week ahead promises far less foreseeable event risk, and our forward-looking DailyFX 1-Week Volatility Index has pulled back sharply. The US Dollar’s strong correlation to volatility leaves it at risk on such a slowdown.
It’s possible but unlikely that the Euro sees strong reactions to upcoming European Purchasing Managers Index (PMI) survey results, a German IFO Business Climate report, and a late-week GfK Consumer Confidence data release. Thus we’ll focus on how US Dollar traders react to calmer markets; we suspect that the EURUSD could bounce as sellers lose enthusiasm.
Recent FXCM Execution Desk numbers show that total Euro trading volume slowed even as it tumbled to fresh lows. While momentum clearly favors further losses, the slowdown acts as clear warning that markets may soon capitulate.
And thus we’re left with somewhat of a dilemma: on the one hand we believe that the Euro will remain in a downtrend, but too many signs warn of a near-term price and sentiment extreme. We advise caution on fresh EURUSD-short positions in the days ahead.
GBPUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Pound: BullishThe GBP/USD fell back from a fresh weekly high of 1.6523 even as Scotland voted to stay within the U.K., but fresh commentary coming out of the Federal Reserve may spur a further advance in the exchange rate should the group of central bank doves talk down interest rate expectations.
A further expansion in U.K. home loans may encourage an improved outlook for growth, but market participants may ultimately turn a blind eye to the minor data prints coming out of the U.K. as the Federal Open Market Committee (FOMC) is widely expected to halt its quantitative easing (QE) program at the October 29 meeting. The key speeches by Fed voting-members William Dudley, Narayana Kocherlakota Jerome Powell and Loretta Mester may play a greater role in driving the GBP/USD next week amid growing speculation of seeing a rate hike sooner rather than later.
Indeed, a greater emphasis to retain the zero-interest rate policy (ZIRP) for an extended period of time may undermine the bullish sentiment surrounding the greenback as Credit Suisse Overnight Index Swaps show a jump in interest rate expectations, with bets of seeing at least 50bp worth of rate hikes in the next 12-months. As a result, a wave of dovish remarks from Fed officials may generate a more meaningful rebound in the GBP/USD as the Bank of England (BoE) sticks to its current course for normalizing monetary policy.
Despite the failure to hold above the 1.6500 handle, the recent series of higher-lows in the GBP/USD certainly paints a constructive outlook for the British Pound, and we may see the pound-dollar break out of the downward trending channel carried over from back in July should the group of Fed officials remain reluctant to move away from the highly accommodative policy stance.
The gold markets initially tried to rally during the course of the week, but as you can see the $1240 level was a bit too resistive. Ultimately, we ended up forming a shooting star, and it appears that we are in fact going to head down towards the $1200 level. That level should be massively supportive, and as a result we feel that the market will test that area. If we can get below there on a daily close, we become extraordinarily bearish of the gold markets, as we should then head down to the 1000 level. On the other hand, if we see some type of supportive candle on the weekly chart, this would be an excellent area to start going long and aiming for $1350 or so.
The EUR/USD pair initially tried to rally during the course of the week, but found the 1.30 level to be far too resistive. With that being the case, the market continued to show weakness, and we broke down to the 1.2835 region. It’s just below there that the 1.28 handle shows significant support, and we believe that a bounce from that area could happen. However, if we get at least a daily close below that handle, we think that the market will then fall to the 1.25 level as Euro weakness continues.
The dollar rallied to fresh six year highs against the yen on Friday and hit a new 14-month peak against the euro as expectations for an early hike in U.S. interest rates continued to underpin investor demand for the greenback.
USD/JPY was last up 0.34% to 109.06 after rising as high as 109.46 earlier in the day, the most since August 2008. For the week, the pair added 1.61%.
EUR/USD was down 0.71% to 1.2830 in late trade, the lowest level since July 2013.
The US Dollar Index, which tracks the performance of the greenback versus a basket of six other major currencies, ended Friday’s session up 0.63% to 84.93, the highest level since July 2013, capping its tenth consecutive week of gains.
The dollar has rallied in the past two months as economic data indicated that the U.S. recovery is progressing strongly, while growth in Japan and the euro zone appears to be faltering.
On Wednesday the Federal Reserve offered fresh guidance on its plans to raise interest rates, underlining the diverging policy stance between it and central banks in Japan and Europe, which look likely to continue with looser monetary policy.
The Fed statement reiterated that it expects rates to remain on hold for a "considerable time", after its bond purchasing program ends, but it outlined in more detail how it will start to raise short term interest rates when the time comes.
The Fed also cut its monthly asset purchase program by another $10 billion, keeping the program on track to finish next month.
The dollar was also higher against the pound, with GBP/USD down 0.68% to 1.6284 in late trade. The pair hit a two week high of 1.6523 earlier on Friday after voters in Scotland’s independence referendum elected to remain inside the United Kingdom.
The pound fell to 10 month lows against the dollar earlier this month as uncertainty over the outcome of the referendum rattled financial markets, before recovering in the run-up to Thursday’s vote.
The pound also trimmed gains against the euro, with EUR/GBP at 0.7878 in late trade, off the two year lows of 0.7809 struck earlier in the session.
Elsewhere, the Australian dollar fell to a fresh six month trough on Friday, with AUD/USD down 0.66% to 0.8928, while NZD/USD was down 0.39% to 0.8119, not far from Thursday’s six month lows of 0.8076.
In the week ahead, investors will be awaiting Tuesday’s data on euro zone private sector activity, amid concerns that the recovery in the region is losing momentum. Preliminary data on manufacturing activity in China will also be closely watched.
The week will also bring a fresh look at the U.S. housing sector, with reports on both new and existing home sales, as well as Thursday’s data on durable goods orders and initial jobless claims.
Monday, September 22
- New Zealand is to release private sector data on consumer sentiment.
- European
Central Bank President Mario Draghi is to appear before the European
Parliament's Economic and Monetary Committee, in Brussels.
- The U.S. is to release private sector data on existing home sales.
Tuesday, September 23- Markets in Japan are to remain closed for a national holiday.
- China is to release the preliminary reading of its HSBC manufacturing index.
- The
euro zone is to publish preliminary data on private sector activity,
while Germany and France are to also to publish data on private sector
growth.
- The U.K. is to release private sector data on mortgage approvals, as well as a report on public sector borrowing.
- Canada
is to release data on retail sales, the government measure of consumer
spending, which accounts for the majority of overall economic activity.
Wednesday, September 24- New Zealand is to release data on the trade balance, the difference in value between imports and exports.
- The Reserve Bank of Australia is to publish its financial stability review.
- The Ifo Institute is to release its report on German business climate.
- The U.S. is to publish data on new home sales.
Thursday, September 25- RBA Governor Glenn Stevens is to speak at an event in Melbourne; his comments will be closely watched
- The ECB is to publish data on M3 money supply and private loans.
- The U.S. is to release reports on durable goods orders and initial jobless claims.
Friday, September 26The euro fell to a fresh 14-month trough against the broadly stronger dollar on Friday as expectations that the Federal Reserve is moving closer to raising U.S. interest rates continued to bolster demand for the greenback.
EUR/USD was down 0.71% to 1.2830 in late trade, the lowest level since July 2013.
The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, ended Friday’s session up 0.63% to 84.93, the highest level since July 2013, capping its tenth consecutive week of gains.
The dollar has rallied in the past two months, boosted by expectations for an early hike in U.S. interest rates, while the European Central Bank looks likely to stick to a looser monetary policy stance.
On Wednesday the Fed offered fresh guidance on its plans tighten monetary policy, outlining in more detail how it will start to raise short term interest rates when the time comes.
The Fed statement reiterated that it expects rates to remain on hold for a "considerable time", after its bond purchasing program ends, while Chair Janet Yellen stressed that the timing of any change in interest rates is dependent on the strength of the economic recovery.
The Fed also cut its monthly asset purchase program by another $10 billion, keeping the program on track to finish next month.
The euro has remained under pressure against the dollar since the ECB unexpectedly cut rates to record lows across the euro zone earlier this month, and implemented fresh measures in an attempt to shore up inflation in the currency bloc.
On Thursday, euro area lenders borrowed less than expected from the ECB under its new low cost loan program.
The ECB said it allotted €82.6 billion to 255 bidders in its new Targeted Long Term Refinancing Operation, or TLTRO. That was well below the €100 to €150 billion predicted by analysts.
The low loan uptake indicated that the operation will have only a limited impact on boosting liquidity in the euro area.
The euro also ended lower against the yen on Friday, with EUR/JPY down 0.37% to 139.95, off the four month highs of 141.20 struck earlier in the session.
In the week ahead, investors will be awaiting Tuesday’s data on euro zone private sector activity, amid concerns that the recovery in the region is losing momentum.
The week will also bring a fresh look at the U.S. housing sector, with reports on both new and existing home sales, as well as Thursday’s data on durable goods orders and initial jobless claims.
Monday, September 22
- ECB President Mario Draghi is to appear before the European Parliament's Economic and Monetary Committee, in Brussels.
- The U.S. is to release private sector data on existing home sales.
Tuesday, September 23- The euro zone is to publish preliminary data on private
sector activity, while Germany and France are to also to publish data
on private sector growth.
Wednesday, September 24- The Ifo Institute is to release its report on German business climate.
- The U.S. is to publish data on new home sales.
Thursday, September 25- The ECB is to publish data on M3 money supply and private loans.
- The U.S. is to release reports on durable goods orders and initial jobless claims.
Friday, September 26EUR/USD bears in full control - JPMorgan
EUR/USD bears remain in full control,
shooting for 1.2769/55/46 and potentially even for 1.2502, notes Thomas Anthonj, FX Strategist at JP Morgan.
Key Quotes
The downtrend of the EUR opened additional downside before a bounce looks to be due. Having decisively broken the potential base for a temporary 4th wave recovery at 1.2908 (wave 1 x 1.618) in EUR/USD the market opened additional downside to the next potential base at 1.2769/55/46 (monthly trend/pivots)."
"A straight extension to the latter is favored unless a break above 1.2996 (pivot) indicates that the 3rd wave low is in place and wave 4 up to 1.3165 (minor 38.2 %) already on its way.
"The latter would provide a good risk-reward to bet on the missing 5th wave decline whereas breaks above 1.3165 and above 1.3274 (daily trend) would constitute a scale jump in favor of a broader 2nd or b-wave rebound to 1.3413 (int. 50 %) and to 1.3701/19 (pivot/int. 76.4 %) at a later stage."
We expect the euro will fall to parity vs. the dollar by year-end 2017 (based on businessinsider article)
"The euro has weakened by 8% versus the US dollar since May," Goldman Sachs' David Kostin wrote in a new note to clients. "We expect the downward gravitational pull on the EURUSD will persist for the next several years until it trades at parity versus the dollar by year-end 2017. From a spot of 1.29, our economists forecast the euro will depreciate by 7% vs. the dollar during the next year (to 1.20) and fall by 22% to parity by 2017."
EURUSD Technical Analysis: Euro Aiming Below 1.28 Mark (based on dailyfx article)
The Euro slid to the lowest level in nearly 15 months against the US Dollar, with sellers now aiming below the 1.28 figure. Near-term support is at 1.2783, the 38.2% Fibonacci expansion, with a break beneath that on a daily closing basis exposing the 50% level at 1.2718. Alternatively, turn above the 23.6% Fib at 1.2864 clears the way for a challenge of the 14.6% expansion at 1.2913.