USD Sinks As Technical & Seasonal Factors Rule

The US Dollar expanded its downward tendency after the FOMC even if the Committee appears to be reinforcing its neutral stance. What are the factors influencing the sell-off? What is the rapid appreciation in the Aussie telling us about the prospects of a China tariffs suspension? Today's report helps to put things into perspective as usual...

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

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Quick Take

While it may come as a surprise for some that the USD keeps selling off on the back of a strong US NFP last Friday, coupled with a neutral FOMC, if one accounts for the technicals bearish outlook and forex seasonals, it makes the follow through in sell-side activity slightly less of a surprise. The explosive rise in the Oceanic currencies plays into the view that the market might start to be front-running Trump's decision to potentially delay the Dec 15 Chinese tariffs. The Sterling, as the market awaits the outcome of the UK election, has shown steadiness in spite of the setback in the last UK Gov MRP poll in which Conservatives saw the lead cut significantly at the expense of Labour. Amid the improvement in risk appetite dynamics as reflected by the up move in equities (not reflected in global yields), the Swissy and Yen found consistent selling pressure. Lastly, as I elaborate in today's charts section, the Canadian Dollar managed to weather the USD bearish storm with success, cementing the view that a bottom may have been found. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices 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.

Fed policy unchanged, rate cuts not expected in 2020: As largely expected, the Fed has announced no change in its policy stance in the US, while cementing expectations for no further easing in 2020 as the landscape stands, something that was clearly reflected through the distribution of the Fed’s dot plot chart (¾ of the members expect no change to lower rates in 2020). Most members were optimistic about higher rates starting in 2021 even if that’s a long shot away, with a further increase expected in 2022.

Same old mantra of data dependence by the Fed: In the Fed statement, the removal of `uncertainties’ in the outlook further reinforced the idea that the bar to cut rates has been set higher. The Committee instead pointed out that the ramifications of incoming data will continue to be assessed on the go to adjust the economic outlook, “including global developments and muted inflation pressures”.

Powell concerned about low inflation: When it comes to inflation, Chairman Powell kept outlining the low inflationary pressures. During the release of the latest US core CPI figures, the numbers came largely in line with expectations, hence not posing an immediate threat to a re-calibration of monetary policy views. At the presser, Powell showed some concerns that if low inflation remains overtime, it may further suppress inflation expectations, which creates less room to cut rates if needed. 

Stubborn GBP ahead of the UK election outcome: Ahead of the UK general election, the GBP was sold in Asia despite it found buyers on dips in Europe/US. it as the Conservatives lead shrinks based on the latest YouGov UK election poll. The results showed Conservatives lost ground at 339 (-20) against Labour 231 (+20). Remember, earlier polls had projected a much larger majority for Johnson. What this means is that the risk of a hung parliament should not be disregarded. Follow this interactive chart by the Guardian for the voting intentions based on all the polls.

Suspense in the US-China tariffs deadline: China said the upcoming 15 Dec tariffs should be cancelled as minimum pre-condition for continued negotiations in trade, according to CNBC reporter, Eunice Yoon. The tweet thread reads: "Chinese experts who follow #trade talks tell me 1) #China side would want Dec 15 tariffs canceled as minimum pre-condition for continued negotiations of phase one deal (if not, would be sign US not serious). 2) #China "extremely reluctant" to commit to massive concrete figures for US farm goods (if China agrees, it would be considered major concession) 3) still bottom basement level of trust Trump team won't toss out any deal."

ECB and UK elections to dominate proceedings: On the UK election front, the time when volatility will start picking up is around the 8 am Sydney time on Friday. Brace yourself as the imp vol options suggests a major range expansion of up to 250-300 pips in GBP/USD. As per the ECB meeting, the Central Bank is most likely going to keep the status quo, with most of the focus on the new ECB President Lagarde’s policy views at her first press conference.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

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The EUR index has recovered some ground off the lows ahead of the ECB policy meeting. Technicals will not act as the main guide in the next 24h as a reassessment of the Euro valuation will come after hearing Lagarde’s first press conference as new President of the ECB. Macro wise, the structure in the index still warrants caution on lower lows and lower highs printed.

The GBP index has stalled at a horizontal resistance line and the 100% projected target, exhibiting a period of consolidation in its index ahead of the UK election outcome. The volatility about to kick the Sterling won’t be for the faint-hearted, so be aware to adapt to it. Anything other than a majority victory by the Conservatives should see the GBP under pressure.

The USD index has had a clean breakout of the previous swing low on the back of the FOMC, unravelling another round of strong sell-side pressure. The consistency in the USD depreciation this month is in line with the USD seasonals weakness we tend to see in Dec. The next target for the Green back appears to be the double bottom printed back in July this year (~0.6% below).

The CAD index, through its recent price action, continues to communicate that the prognosys built around having found a meaningful bottom is so far holding true. The point I’ve been making is that each leg down has carried lesser commitment - magnitude of the downside extension - than the previous (-1.65%, -1.45%, -1.10%). The aggressive sell-off in the USD has barely budged CAD longs, which is yet another signal that this bottom is being bought up.

The JPY index has resumed its bearish trend by breaching the previous low, a technical event that set the stage for further follow through continuation towards the double bottom seen last June, an area where it should align with pockets of significant liquidity in JPY-related crosses.

The AUD index has turned around very aggressively off the lows, in a move that now in hindsight portrays a market clearly interested to take the currency into a liquidity pocket before smart money sponsors the mark up phase. The fake out of the breached low should now shift the attention towards the previous level of resistance as the next target.

The NZD index, after returning towards its latest point of a demand imbalance, which coincided with the broken 100% proj target, eventually found strong buy-side flows as bulls regrouped. The bullish outside candle off the daily is a precursor for higher prices in the coming days, in what has become the cleanest and strongest trend in FX since November.

The CHF index failed at the resistance level, which has resulted in the market entering range-bound dynamics. My view to personally staying away from forming any strong opinion on the Swissy is reinforced based on the recent price action seen. There is simply no distinctive commitment to take the currency into any specific direction with much conviction.

Important Footnotes

  • 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
  • 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.
  • 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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