Forex Today - Fed chair Powell underwrites USD strength

Market Analysis /
Greg McKenna / 18 Jul 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

QUICK SUMMARY

The USD is up half a percent this morning at 94.97.

USDJPY has mapped that move higher to 112.92 while the Euro lost 0.5% to be at 1.1656. That the Euro’s weakness didn’t get a bigger nudge from dovish comments from Oli Rehn is interesting. GBPUSD has been caught up in the maelstrom of Brexit shenanigans (PM May even tried to send the Commons into recess and summer holidays early), Mark Carney saying a Hard Brexit would impact rates, good employment but no wages growth, and of course the USD’s move – it’s at 1.3112, down 0.9% giving up substantial early gains.

Indeed the USD had been under pressure before Powell’s testimony to Congress where he reaffirmed the US economy is strong and rates are still heading higher.

The early USD weakness saw the Aussie peak at 0.7438. But it’s back at 0.7381– on ST support – for a loss of 0.5%. The Kiwi was also sharply higher at one point yesterday after the RBNZ’s preferred inflation gauge accelerated to the lofty height of 1.7%. A 7 year high which drove NZDUSD back to resistance with a high at 0.6840. It’s at 0.6773 now, roughly falt day on day. The CAD lost 0.4% and is at 1.3186 – still respecting that trendline.

And the Yaun continues to weaken. It's closing in on the recent highs once again at 6.7245 in USDCNH  terms and 6.7018 in USDCNY terms.  

BIGGER PICTURE

If you want to read more of my analysis on Jerome Powell's address and what it means please see Markets Morning from earlier. 

Policy and economic divergence are a thing folks.

I know that I have been banging on about this for months and months but it remains the key to the outlook for forex markets – along with technicals and positioning that is.

What Powell did last night when you juxtapose it with the concerns that Bundesbank President Weidmann expressed about the German economic outlook and Oli Rehn’s caution over the ECB locking itself into a premature path is a clear signal that the US is at a very different point in the cycle to Europe, Japan, and increasingly China. Of course, it’s also at a different point in the Cycle to almost anywhere given the fiscal stimulus and self-sustaining momentum the US economy seems to have right now.

Source: Twitter Screenshot, I'll expand
Source: Twitter Screenshot, I'll expand

That’s not to say that the improvement in other jurisdictions economic data isn’t important.

The moves in the CESI scores for the US and other nations and areas is a primary input into my analysis framework as readers know. So, as I’ve been highlighting in recent notes the recovery in data from the UK, Japan, EM, Canada, and the EU has been an important sentiment changer in forex markets. That hasn’t changed and many analysts still see this trend as a handbrake on the USD’s rally. I agree. But only until the recent lows give way. Then the technical will again predominate.

Because if the Euro’s inability to drive higher, if USDJPY’s inability to worry over market ructions, and if the continued selling every time the Aussie or CAD rallies recently tells us anything it is that structurally the USD seems to have the upper hand.

But it hasn’t broken out yet except against the Yen. Is that the precursor to a push through 1.15 in EURUSD terms or 73 cents for the Aussie and so on? It could be. But for the moment we are in a range and perhaps this next week or so will continue to respect that until we get the next data dump in early August. Then forex traders, like Fed chair Powell, will be data dependent.

Forex Chart of the Day is GBPUSD. Sterling is caught in a maelstrom as I highlighted in the introduction. Conventional wisdom is still that a soft Brexit eventuates and that is keeping Sterling bid. But rumours are rife the EU is readying for a hard Brexit – at least on Twitter. That, plus the trouble with the May government, Mark Carney saying a Hard Brexit would impact rates, and the USD’s move have all knocked GBPUSD back to the bottom of the range. 1.3045/50 is the key now. A break could suggest a move under 1.29.

 

Click on me, I'll expand
Click on me, I'll expand

DATA:

 It’s a quiet day in Asia for data with the Westpac Leading index for Australia the only release of note. Tonight though UK inflation data – RPI, PPI, and CPI – are out along with Euro area CPI. They could move the needle on forex rates.  Tonight Powell is back on Capitol Hill giving his second round of testimony and we also get housing starts and building approvals along with the Beige Book. That might be interesting at 4am tomorrow morning.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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