USD Vol Set To Spike On Fed's Powell Speech

The USD index is on stand-by with a devoid of notable movements as the market awaits the semantics used by Fed’s Chair Powell in today’s critical speech at the Jackson Hole. The price action in the currency has been behaving as if Powell may disappoint the doves again. Until proven wrong, the chart is telling us the index remains bullish.

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

It's been a long wait for those trading USD-centric pairs but the event of the week set to revitalize volatility is almost upon us. All the eyes will be fixated on Fed's Chair Powell this Friday at 14:00 GMT, scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech billed "Challenges for Monetary Policy". The title is apt to the times we live in and an opportunity for the market to re-adjust its outlook towards the Fed’s Sept policy decision and forward guidance. Aside from Powell, we definitely saw a fair share of action in the Sterling, by far the best performer, after optimistic comments by German Chancellor Merkel in finding a backstop solution by the Brexit deadline. One should really take this rhetoric with a major pinch of salt as the position by the EU has been unshakeable in terms of the backstop not being negotiated. The Kiwi is another currency that suffered from solid sell-side flows until RBNZ Governor Orr spooked an overly committed short market by implying that the RBNZ may not have as much urgency to keep lowering its rate as previously thought. Meanwhile, the Euro, even if the Eurozone PMIs came a tad better, could not sustain the early gains as the index shows. The Swissy was a notable loser on Thursday as the risk tone was kept relatively stable. Again, a better performance was seen by the Yen, rather neutral for the day. Lastly, the Aussie and the Canadian Dollar traded under more selling pressure in the last 24h, the former influenced by a weaker offshore Yuan. 

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.

Fed's Powell to inject much-needed vol in the USD: The key event this week comes on Friday at 14:00 GMT, when Fed Chair Powell is scheduled to speak at the Jackson Hole Economic Policy Symposium in a speech billed "Challenges for Monetary Policy". It’s likely to be a major market mover as the market will have an opportunity to re-adjust its outlook towards the Fed’s Sept policy decision. The line-up of all the speakers can be found in the following link

Risk of Powell under-delivering? The 100% chance for a 25bp rate cut in Sept and 100bp worth of cuts by the end of 2020 remains the market central scenario. It will be crucial to interpreting what’s the new position by Powell after the announcement of more tariffs to China and the dramatic drop in US yields ever since the last FOMC. If Powell does not create a sense of urgency to lower rates in order to adjust to weaker global growth and trade uncertainty but instead sounds prudent to pre-commit to a set course of easing as domestic conditions are yet to tighten materially, the market will read that as a disappointment this week (higher USD). The notion that Powell will still remain conditional and ambiguous in his message in order to strike a balanced message that causes no major market disruptions is still the main view. This means Powell could stick to the script the market is supporting by hinting at another 25bps cut in September while stressing that the committee bias is now back in accommodation mode.

Keep an eye on the G7 meeting: Other than the Jackson Hole Symposium, the G7 meeting will also be held, where US President Trump is scheduled to hold meetings with leaders of Britain, France, Germany, Canada, India. A senior official crossed the wires noting that “G7 leaders would not vote on whether to readmit Russia because the G7 is based on consensus, but the topic is likely to come up,'' adding that “Pres. Trump is set to raise with France's Macron his concerns about French digital services tax”

Trump continues to attack the Fed: POTUS tweeted “Germany sells 30-year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!.” If the Fed fails to act in the dovish manner Trump expects, it raises the risk of the US administration seriously considering to enact tariffs on auto and other EU imports later this year.

The ECB minutes keep the market guessing: The accounts of the last policy meeting included a line about "various options should be seen as a package, i.e. a combination of instruments with significant complementarities and synergies, since experience had shown that a policy package — such as the combination of rate cuts and asset purchases —,  seen as more effective than a sequence of selective actions.” The current consensus is for a 10bp cut to the deposit rate and a fresh round of asset-buying program to the tune of €40bn/month.

A raft of Fed President interviews as aperitif: Philadelphia Federal Reserve President Patrick Harker (non-voter in 2019 but to become one in 2020) said in an interview on CNBC from Jackson Hole that “I think we should stay here for a while and see how things play out” adding that his endorsement towards a Fed’s July 31 rate cut came “somewhat reluctantly”. The comments definitely read more hawkish. Meanwhile, Kansas Fed President Esther George, who will be the host of the Jackson Hole symposium and a dove supporting a rate cut during the July meeting, said in a Bloomberg TV, “as I look at where the economy is, it’s not yet time. I’m not ready to provide more accommodation to the economy without seeing an outlook that suggests the economy is getting weaker.” Another one who came forward in an interview aired by CNBC was Fed’s Dallas President Kaplan (non-voting member) who backed the Fed's July rate cut, in what’s been perceived as a dovish spin from his stance back in July. Fed's Kaplan continues to see risks to the downside in terms of growth generation, adding that he will have an open mind about further action if needed. During Asia this Friday, Fed's Kaplan also said that “he sees the potential for a Fed rate cut at the September FOMC meeting.”

The Pound outperforms the rest of FX: The Sterling exploded higher after German Chancellor Merkel re-invigorates the chatter that Europe may leave one door open to find a backstop solution by October 31. Merkel added that “we can work on finding a regime that keeps the Good Friday agreement and also ensures the integrity of the EU single market.” The market interpreted the optimistic comments from Germany's Angela Merkel as Pound positive.

Italy in the process of forming a new government: As part of Italy’s political crisis, where the government was dissolved earlier this week, talks are currently underway to form a new majority government. The Italian President Sergio Mattarella summoned the countries’ main political leaders in an attempt to either form a solid coalition government among Forza Italian, the Democratic party, the League, and the Five Star Movement, or if the talks fail to yield the results desired, a snap early election will be called, in which case, the far-right League party leader Matteo Salvini should take the lead to take control of the government.

Eurozone PMIs came not as bad as thought: The risk dynamics and the Euro (only temporarily) were underpinned after the better-than-expected euro area PMIs, which should be seen from the context of very depressed levels anyhow. Besides, by deconstructing the details of each indicator, the picture remains ugly. France August flash manufacturing came at PMI 51.0 vs 49.5 expected, Germany August flash manufacturing PMI stood at 43.6 vs 43.0 expected, while the EU August flash manufacturing PMI improved to 47.0 vs 46.2 expected. The main driver of the pick up in headline readings was business growth.

China in no mood to sound conciliatory: The Chinese commerce ministry came forward with some spicy comments by noting that “despite the US tariffs delay, any new tariff measures will lead to escalation”, adding that “China will have to retaliate if US persists on the current course.” The commentary is nothing new and markets barely badged as it’s clear that China is not ready to strike a conciliatory tone after what they see as a betrayal by Trump to break the truce earlier this month.

PBOC allows a weaker Yuan: In the last 2 sessions, the PBOC has adjusted the valuation of the offshore yuan to the weak side, leading to a minor risk-off environment where the Aussie, NZ Dollar took a hit. The USD/CNH has been hitting the highest levels for the week. Reuters reports, citing unnamed traders familiar with the matter, that major state banks in China are said to be intervening the market in order to be supporting the yuan.

The Kiwi gets a boost by RBNZ Gov Orr: The NZD appreciated in the Asian session on Friday, recouping some of its sharp losses, even if the Q2 NZ retail sales data (ex inflation) came slightly weaker at 0.2% vs 0.3% expected, led by weaker consumer confidence and persistent weakness in the housing market. What propelled the Kiwi included comments by the RBNZ Governor Orr, who said that “the 50bp rate cut reduces the probability of having to do more later, but even more importantly, he seems to have hinted that the RBNZ has now bought time to stay sidelined for a while by saying that “we can afford to wait, watch and observe what's happening.” This lack of urgency was a NZD positive. Orr also said that “unconventional policy (QE) is far from our central scenario.”

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

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.

The EUR index remains bearish and offered. The printing of a sizeable bearish rejection bar above its 13-d ema baseline with a long upper shadow reflects a market still on the hunt to sell Euros at wholesale prices as the ECB potentially readies a large easing program.

The USD index is on stand-by with a devoid of notable movements as the market awaits the semantics used by Fed’s Chair Powell in today’s critical speech at the Jackson Hole. The price action in the currency has been behaving as if Powell may disappoint the doves again. Until proven wrong, the chart is telling us the index remains bullish.

The GBP index has transitioned into a clear bullish phase, although the major elongation of Thursday’s candle is likely to have to retrace in coming days for buyers to re-group. I find it difficult to expect much follow-through after such an expansion in price way beyond the daily ATR.

The CAD index has been trapped in a narrow phase of accumulation, well supported on every dip by a clear area of support right underneath. The index has been on a process of ‘wax and wane’ for most of August without projecting neither much strength or weakness, and that alone has allowed the currency to do well against most of the FX complex exc risk-off currencies.

The AUD index looks like it may be about to resume its downward bias as the last close on Thursday communicates that sellers managed to retake the downside of the baseline on higher tick volume. We’ll have to wait for today’s Fed’s Powell outcome to see, based on the risk tone, the next movements in the oceanic currency. For now, the outlook looks poor.

The NZD index holds the weakest outlook even if comments by Governor Orr in the current Asian session have propelled the currency to recover some ground. Technically, there is a lot of work that must be done for buyers to shift the negative bias.

The JPY index continues to hold steady above the 13-d ema baseline, which has acted as a fantastic guidance to anticipate bottoms in the price of the currency. Much of the Yen’s performance in the next 24h will hinge on Fed’s Chair Powell speech today. Technically, the consolidation pattern above the baseline is still, on aggregate, a bullish sign. The fact that the Yen could not breakout sub baseline even as the risk tone improved is a red flag on its own.

The CHF index has been debilitated below the baseline with the latest sell-side candle on Thursday carrying an increase in tick volume, a hint that follow through towards the red line of support could be the next logical target. However, the reset button to re-assess one’s outlook on Fed’s Powell intervention is around the corner, so be aware of that before overcommitting.

In terms of unfolding directional biases in line with the model that I apply, first I will touch on the week-long short-sided position I’ve carried in the NZD/USD where my 2nd take profit area got hit before RBNZ Gov Orr led to a rebound in the pair. I am still holding about ½ of my position short for an eventual take profit target of 0.6334.

The AUD/USD market, on the 8h chart, which is an excellent temporality to capture the flows from each session, also triggered a short signal on Thursday on a retest of the baseline after this one had been cleared on the previous candle. It looks as though the market is about to enter a tight consolidation as the bollinger band narrows and a double rejection of 0.6760-65 occurs. This will automatically result in my short exposure covered for no risk ahead of Fed’s Powell.

In the AUD/CAD, the weakness in the CAD has caused my short to be rejected at the area of support where I was expecting the pair to struggle. Fortunately, due to the money management, whenever I spot a double rejection of a level amid a decrease in vol (bollinger narrowing or flattening), that’s a warning sign to protect your position by moving the stop to breakeven, which is precisely what I did to scrap the trade for a 0 loss result.

In the AUD/JPY, the daily timeframe has triggered a short position as per my model. The current market condition I qualify it as range-bound in the context of a bearish trend. The close below the baseline with a pick up in volume at a time when the fisher transform and the CCI are pointing bearish is further evidence that the short meets the criteria stipulated. I will certainly be monitoring the position very closely and potentially scrap it ahead of the Fed’s Powell speech, depending on the type of movement seen in the European session. Playing defensive ahead of this event, set to increase vol by XX fold, is very important to minimize risks.

Lastly, I see the latest pattern out of the H8 chart in the CAD/CHF, as constructive for an eventual upside continuation. We’ve seen a critical resistance (blue line) violated, with a close well above in increasing tick volume, all while above the 13-ema on the daily (orange moving average) and hH8 (black moving average). The indicators are also pointing in the right direction, including the fisher transform and the CCI stay way above 0.

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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