Forex Today - The USD is under pressure again, will the ECB break it wide open?

Market Analysis /
Greg McKenna / 26 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. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.

QUICK SUMMARY

Euro is higher this morning by 0.44% at 1.1733 and just below resistance. GBPUSD is up around the same amount at 1.3195 while USDJPY has now only fallen 0.3% as the risk rally mitigates news this morning of tweaks to BoJ policy toward ETF purchases – it's at 110.84.

The Aussie has shaken off the disappointing CPI news yesterday which suggests no discretionary pricing power and with it a weakness in aggregate demand. AUDUSD fell to 0.7393 yesterday but lifted as the Yuan recovered in afternoon trade and it’s now up at 0.7449 with a gain of 0.4% as well. The Kiwi at 0.6833 is just below its  Maginot line at 0.6850 while the CAD is the best performer and first clear break of trendline among the majors – USDCAD is at 1.3041, down 0.83%.

BIGGER PICTURE

I want you to read something I saw on Dow Jones this morning. It helps explain what might be going on in Forex markets, why they don’t really react to “fundamentals” as much as they did. It’s from Commerzbank – It’s a big excerpt (my bolding).

EUR/USD has been trading in a very narrow range in the past month, mostly around 1.17, despite the fact that global trade disputes have intensified, something that could be explained by the fact that liquidity on the foreign-exchange market "is offered less and less by the banks and increasingly by nonbank financial institutions," Commerzbank says. The nonfinancial institutions could be "following short-term trends and fewer and fewer operate based on fundamental arguments," Commerzbank adds. But, "the current sideways phase should not mislead the end-users of the FX market and allow them to lean back and ignore the exchange-rate risks," it says, adding that from a fundamental point of view "we expect it [the forex market] to point to the upside."

I think that is exactly what’s going on. Short-term technical and headline chasing Algos. Knowing your charts well has never been so important.

That’s kind of uncomfortable for someone who spends a big chunk of his day researching the economy and markets to get a feel for what’s going on and where things might be heading. I know in my own trading that there has been a growing sense of frustration at the disconnect between fundamentals and markets. Certainly I’m a chartist too but as Keynes said in his “Beauty parade” analogy we are now playing in the 2nd, 3rd, and 4th orders of announcement and headline effects as well as anticipation of what the anticipation might be.

Interesting times.

Anyway, the Euro is the key to this.

After last night's trade news you'd expect stocks in the US to be much higher but what you mightn’t expect is that the US dollar is weaker. I say that because over the past few months trade battle news has been generally announcement negative for the USD. But this morning the announcement of some sort of deal has also been announcement negative for the US dollar.

Welcome to forex markets 2018 style.

Of course I get it, Ifo and PMI data has shown the impact of trade uncertainty in Europe and other jurisdictions of the trade battle. So a deal should lift some of that pallor, aiding growth, aiding the return of inflation, and aiding the ECB and other central banks plans to ease monetary accommodation.  

So to the ECB tonight where the set up is there for the ECB to deliver a hawkish message of growth, inflation, and an end to QE. If that's the script Mario Draghi and his colleagues follow then Euro can break higher and drag other currencies with it.  1.1740/50 is the key level to watch before 1.1850 and then 1.1960/1.2060.  

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

A little BoJ smoke?

Yesterday I highlighted that the conversation about the BoJ and changes they might make to policy were important in setting the overall tone of the conversation around the Yen and expectations about the reduction in global central bank stimulus. 

So it is interesting that overnight the guys at Forex Live highlighted that the BoJ is shifting gears with its ETF program. It's not that they are reducing their buying, but they are shifting the buying from Nikkei to Topix but keeping the volume the same.

You say I'm being pedantic. This is only really a bookkeeping entry. But it's a little smoke which suggests the BoJ might genuinely be re-evaluating policy. 

DATA:

On the day, the ECB meeting and Mario Draghi’s press conference are the big events for forex traders and markets in general. No real change to the message that things are working back toward ECB targets and the taper is on track is expected. Also out are US goods trade balance, durable goods orders, Kansas City Fed index, jobless claims, and wholesale inventories.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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