A Soaring USD: Will The FOMC Revert The Trend?

This week's FOMC is huge by historical standards, and I don't say that lightly, as the pattern indicates that whenever the Fed initiates a first-rate cut, it tends to develop into a rate-cutting cycle rather than a one and done, which is what Trump would love to see and what the global economy needs to spring-board a reflationary recovery on weaker dollars.

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. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

Quick Take

As a new week kickstart, gyrations in the market should be rather contained as the large capital moves to the sidelines, unlikely to be drawn back to markets until we get the clarity necessary after this Wednesday's FOMC meeting puts it back to work. On the lead up to one of the most important FOMC meetings in recent history, the USD, which by default would attract all the interest, has made further headlines as it completed its 6th day of a winning streak on the back of a strong US Q2 GDP. The stellar performance by the USD has reportedly ignited a debate about the possibility of a USD intervention by the Trump administration. For now, it looks like jawboning the currency could be where they draw the line, but watch this space closely as this week's FOMC will give us clarity in many fronts, including whether or not the Trump administration will flex its muscle on talking down the USD, with its valuation now crucially important for the stability of the global economy at a time where trade wars and slow growth dominate. This week's FOMC is huge by historical standards, and I don't say that lightly, as the pattern indicates that whenever the Fed initiates a first-rate cut, it tends to develop into a rate-cutting cycle rather than a one and done, which is what Trump would love to see and what the global economy needs to spring-board a reflationary recovery on weaker dollars. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

GBP plummets as Boris' Brexit crusade underway: A wave of fresh sellers hit the Pound as the market comes to grips that re-opening the Brexit withdrawal agreement is very unlikely after the cold water thrown by EC President Juncker late last week. UK PM Johnson, nonetheless, is planning to meet French President Macron over the next few weeks to push for a renegotiation even if at this point the chances look thin at best. Meanwhile, Norbert Röttgen, the head of the Foreign Affairs Committee in the German parliament, made a bold and rather hash tweet statement against Johnson, noting that “Neither boastful speeches nor bullying will succeed in making us give up EU principles and unity. Sadly, both in words and deeds Johnson fails to reach out to country and continent.” Betting markets assign over a 35% chance of a no-deal Brexit by the end of October.

US GDP overwhelms market forecasters: The US Q2 advance GDP beat expectations by coming at +2.1% vs +1.8% expected, which led to follow through appreciation in the US Dollar for a 6th straight day versus its main peers. Consumption was a key driver for the pick up in growth, while trade and inventories didn’t come as poor as previously feared. However, one of the key sectors the Fed has been most concerned about, such as business investment, remains in a fragile position, as does housing. The data should really put the nail in the coffin not to expect a 50bp rate cut by the Fed, even if the pricing by the market has plummeted to barely 15-20% since last week.

USD intervention talk does the rounds: The re-ignition of a strong USD has caused the market to grow more worried that the Trump administration may be considering a strategy aimed at intervening in the USD to weaken it. President Trump did convene a Cabinet-level meeting to study options to soften the USD, although the denial that such action is on the table by White House Economic Adviser Larry Kudlow ruling out any currency intervention has so far appeased fears, even if he recognized that Trump is concerned other countries may be manipulating their own currencies lower.

Trump not showing his hand: But Trump, who always likes to play the good and bad cop by taking both sides to create potential leverage, said “I didn’t say I am not going to do something on the dollar”, adding that “ I could do currency intervention in two seconds if I wanted”. Short-term, Trump was reportedly saying, via Bloomberg, that lower rates from the Fed will help lower the dollar and avoid intervention. Trump clearly doesn’t close the door to intervention, even if the bar to do something on the currency appears to be quite high, both due to his inner circle’s critics, and because it would set a very dangerous precedent, even if Trump won’t be budge on the latter.

US-France dispute over digital tax: The tensions between France and the US over France's 3% digital tax on the revenue to US bluechip companies such as Amazon or Facebook has been received with renewed threats from President Trump, who is looking at a range of policy options to counter-attack on trade, such as taxing French wines if the digital tax goes forward. The approach of the US towards France is seen as a proxy to how aggressive Trump may act going after Europe on further trade barriers.

US companies' profits fuel S&P 500 rally: The US earnings season has so far been very solid so far with more than 75% of the companies beating profit expectations. Alphabet, the mother company of Google, soared over 10% after it beat expectations and announced a share buyback. With the backing of earnings, brighter US fundamentals in the last month and a Fed that is en route to commence what could morph into a rate-cutting cycle if trade uncertainties continue, the S&P 500 made new all-time highs.

Fed's FOMC all that matters: The early part of the week is set to be a low key affair with no events of Note on Monday and only the BoJ policy meeting and the US CB consumer confidence on Tuesday. However, come Wednesday, and the whole financial world will be taken hostage by the decision of the FOMC on interest rates, with a 25bp rate cut the overwhelming consensus. What happens after the event and most importantly, how it happens (the type of message delivered), will dictate the outlook for the US Dollar during the month of August and possibly the Trump administration’s stance towards a hypothetical USD intervention down the road.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts (Tech, Funda, Intermarket)

As the cornerstone to analyze the overall market sentiment towards the currencies most heavily traded, the equally-weighted currency indexes show the US Dollar as the currency in best form, having accumulated over 6 days of gains in a row as the USD equally-weighted index not only leaves behind a descending trendline but also it broke and accepted above its previous macro swing high, effectively validating a new daily bullish market structure. The Euro also keeps edging higher, with buyers still lurking around after the major ECB-led daily bullish outside day, even if the impetus is far more tepid than in the USD. Note, the index is still capped by its daily baseline (13-d ema), which makes the prospect of further gains more dubious. Fundamentally, the Euro also faces big limitations as the ECB prepares its new QEII bazooka in Sept. The Japanese Yen is another currency where the index displays solid gains on Friday, but it is still blocked from further advancements by an area of key supply on the daily index. The Canadian Dollar presents an attractive stance to encourage further buying on dips after it regains a key area of resistance now turned support and cleared the daily baseline. One currency I remain quite constructive about as reiterated last Friday, judging by the huge demand area being retested on its index (July’s POC), is the Swiss Franc. I’d expect a rejection this week. Lastly, the three contenders lagging significantly behind the rest include AUD, NZD, and GBP. But it’s only the latter where I observe the most short-term potential to keep depreciating. The risks are rising for market makers and reversal to the mean strategies to come in with more conviction on the Oceanic currencies after the losing string seen, with Friday’s selling on low tick volume.

The first two charts that come to my attention include the AUD/CHF and NZD/CHF. Here, the assumption that bears should remain in control judging by the analysis of the individual currency indices (see Friday note), alongside the bearish breakout of support in AUD/CHF and the screaming bearish pin bar rejection in the NZD/CHF, continues to prove the validity of the bearish case. While limited flows on Monday may see a minor grinding of the price higher, the signals given continue to suggests that that risk in these markets are skewed towards the downside.

Oil is another market where the combination of price action, volume and market structure, all align in favor of the selling resuming. Not only Oil printed a commanding bearish outside day last week, but the candlestick pattern has been followed by two days of decreasing volume activity, with the close by NY both days failing to retain the immediate resistance. Watch for support around the 55.00 to come under siege if Friday’s low gives in.

A currency pair that I find it hard to see gaining further momentum without some type of temporary pullback is the EUR/CHF. This is a market that has been trending lower since May, which makes the retest of 1.1050 or thereabouts a logical area to take some profits and re-assess, while sellers still find justification to back up their bias on the assumption that the ECB is set to flood financial markets with extra cheap money to support the EU recovery.

An interesting play for Monday, even if not for the faint-hearted, which we are starting to see yield some results in the Asian session, is to fade the breakout lower in the EUR/USD. Here, a case can be made that reversals back to the mean do hold credence from a technical standpoint, as the exchange rate has reached a massive macro support level, confluent with the 100% proj target, with price action rejecting the level post ECB, followed by a low volume tap on Friday. It’s not looking as though the sellers have enough ammunition to keep sending the pair lower short-term. Note, this case can be negated if we see a breakout and close on the daily sub 1.11 with volume increasing.

The last chart to comment on includes the GBP vs CAD, USD, CHF. I believe, based on the fragile position of the Sterling index, coupled with the bad augurs on Brexit heading into August, that the British currency has more room to fall against the strongest contenders in forex at this point. I personally see the North American currencies and the Swiss Franc as the best positioned to capitalize on the miseries on the Pound, which when reverting back to the charts, the charts do seem to agree by looking technically very bearish. As a caveat, ideally, we should have seen an increase in volume tick last Friday, which we didn't. The GBP/USD short, which was a pair I touched in last Friday’s note, looks like it’s run away, but GBP/CHF and GBP/CAD still look rather attractive to see a retest of the previous lows before a re-assessment is conducted.

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. 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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