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Buckle Up For A Pick Up In Volatility

Buckle Up For A Pick Up In Volatility

In today’s report, I am shifting gears by focusing on the latest technical developments in the most relevant G8 FX charts to investigate not only the established biases but what are the critical decision points...

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.

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Quick Take

In today’s report, I am shifting gears by focusing on the latest technical developments in the most relevant G8 FX charts to investigate not only the established biases but what are the critical decision points one must pay attention today. Before I get into the nitty and gritty, be aware that the rise in the Yen index, alongside the sharp selloff in both US equities and a more moderate decline in US30-year bond yields, puts us in a ‘true risk off’ microenvironment as market participants prepare for the EU Summit on Brexit and the ECB policy statement. It’s going to be a busy day ahead, especially for the EUR and the GBP, even if the USD and the JPY are also poised to move quite vividly in light of the fast transition into ‘risk off’ conditions as well as the fact that we get the inflation numbers out of the US at the same time as ECB Draghi takes the stage. Later on the day, the FOMC minutes will also be released, with a lot of attention to be placed on the narrative of the Fed after the more dovish than expected outcome from the last meeting, as well as the dynamics around the future composition of the Fed's balance sheet.


Recent Economic Indicators & Events Ahead

Source: Forexfactory

Latest Key Technical Developments In G8 FX

EUR/USD: Acceptance Above Range, Reset Post ECB

It’s all about the ECB to get the next directional bias. The focal points of attention for today include any clarity around the next round of TLTROs to provide cheap funding to EU banks, while the stance of the Committee on the economic developments will also be closely watched. Back on April 2nd it was highlighted that the risk of a bearish cycle termination was on the rise given the decreasing magnitude of each leg down. Well, the opposite is true in the ongoing bullish structure, where we’ve seen the formation of 2 legs up, each marginally greater than the other. What this suggests, based on the applied market structure principles I teach, is that the credence for this market to stay bullish is technically justified, conditioned to the ascending trendline being respected. I’ve marked in the chart all the levels that you should be paying attention as that’s where the big decision will be made.

GBP/USD: Awaiting Brexit Headlines In A Sea Of Choppy Water

I’ve highlighted in circles the absolute best areas to consider trading positions as that’s where the highest concentration of liquidity is likely to reside. The bias is neutral as the market awaits which way we go in the Brexit process before committing fresh capital. Remember, this is a period of ‘peak noise’ in the whole saga, which is why one can get easily whipsawed in either direction with ease. Note, 1.3060-65 acts as the midpoint of the broad range the pair is confined into, which means it can be used as a reference to analyze which side is taking temporary control of price action.

AUD/USD: Approaching 3rd Test Of A Trendline

There are definitely warning signs for the interest of buyers, even if it’s far from all being lost. The caveats I find for the pair to stay bid come in the form of a 2nd leg up decreasing in magnitude vs the prior initiated move up originated from April 2nd. Secondly, the retracement off a 3-week high has come fast and furious, which is not the ideal speed you want to see if you consider being a buyer off the trendline intersection just a few pips below the current price. Also notice, the breakout of 0.7130 has only achieves a 50% proj target, falling way short of the expected 100% at 0.7172. What’s more, the ‘true risk off’ tone near term makes playing longs trickier as the intermarket flows turn negative.

USD/JPY: Sellers In Short-Term Control

There is no doubt that the market structure has turned negative short-term. However, that must be conveyed with a still benign mid-term structure as the rate is yet to break the ascending trendline coming from March 25th bottom. It won’t materialize without substantial efforts by sellers given the confluence shown, even if any disappointing setback for the USD on the back of the ECB & US CPI may make the job easier for sellers as liquidity temporarily evaporates around these events. Any attempts for a rebound should still find grateful sellers given the ‘true risk off’ microenvironment traders have to navigate, which means the 111.25-30 vicinity ahead of the descending trendline are the clear areas to engage if your view is to keep capitalizing on the Yen strength.

AUD/NZD: Unwinding Of Longs Underway

By the vol standards we’ve come to suffer in the currency market, this pair has seen quite a stellar run, even if the best days to exploit the long bias may have come to an end judging by the back-to-back violation of 2 ascending trend lines one could have drawn. Note, there is a huge level of daily resistance-turned-support where plenty of buying interest should be expected in what could be an ideal intersection to consider adding longs if the market provides enough technical evidence.

NZD/USD: Bearish Cycle Reaches Full Maturity?

The way we’ve come down in the exchange rate resembles the gyration in price action experienced by the EUR/USD in the last week. In the case of the Kiwi, each leg sold has reflected lesser amounts of conviction as the magnitude of each extension demonstrates. In market structures 101, it means once the 3rd leg down has come to an end, we are likely to transition into a period of distribution. It is precisely this permutation into a consolidation pattern that has transpired, with the violation of the descending trendline an obvious sign that the rhythm of this market has now shifted to neutral. I’ve marked in the chart, mainly in blue (hourly levels), the key decision points today.

USD/CAD: Snap Back After Overextended Selloff

The more the rubber stretches, the more it’s going to pull in the opposite direction, which is precisely what we saw in this exchange rate following a marginal breach of the 100% proj target at 1.3295. The failure to find acceptance sub 1.33 is a precursor that this market should be seen from the context of a broad range trading between 1.3280-1.33 and 1.3445-50. Within this box, we can then scale it down into the more granular trends, where the impulsive buying of CADs on Monday makes a retest of the resistance at 1.3350 a key decision point where the market may rotate from. Be aware, we don’t really have a pre-established bias from an hourly and above given the failure below 1.33.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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