FX Weekly Outlook: USD/JPY, GBP/USD, EUR/USD key levels to watch
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Fed minutes revive risk-on trade
The US Dollar started the week attempting a recovery with the Dollar Index (DXY) up 0.85% on Monday after a rebound started late last week. But the appetite to buy the dollar was short-lived as the DXY found strong resistance just below the 108 level and proceeded to turn lower once again.
A big catalyst for the renewed selloff in the dollar was the release of the Fed meeting minutes on Wednesday, which offered a dovish tilt that markets were all too happy to take on. It’s hard to tell whether this was a surprise to markets given the recent events. On the one hand, the monetary policy statement had suggested that members of the pricing committee had started to show concern about the ongoing pace of tightening, but the comments from Powell at the press conference after the meeting had been extremely hawkish, with the key takeaway being the risk of under-tightening.
We also had some weak economic data out after the meeting, and whilst that was not factored into the minutes, markets were already somewhat positioned for a weaker Fed, which in turn played out.
The British pound has been one of the best performers this week, up 1.65% against the dollar, 0.9% against the Yen, 0.86% against the euro, and 0.77% against the Aussie. Part of this has been relief trading on the back of the autumn budget being released last week and helping to restore some confidence in British markets. It also helped that the UK supreme court ruled that the Scottish Government cannot hold another independence referendum without approval from Westminster, removing further risk premiums from UK assets.
Aside from the dollar, the euro was one of the worst-performing currencies this week, finishing lower against the Yen, the Aussie, the Swiss franc, the pound, the Swedish Krona, and the Norwegian Krone, dropping over 2.5% against this last one alone.
What is your sentiment on USD/JPY?
The recent upward rebound attempts in USD/JPY have found resistance around the 142.25 area, at which point the move lower has been significant, showing the willingness of sellers to bring the pair lower. In fact, the pair had been largely overbought until the top of the rising channel back on October 21st, and USD shorts have taken advantage of this throughout the last month.
It seemed for a bit that the pair had managed to de-pin itself from yield differentials, but it seems like this relationship has caught up once again, although it's hard to determine which factor is currently leading the moves. Yes, we have seen USD/JPY move lower as US yields retrace, but there seems to be a lack of followthrough when it's the other way around. So far it looks like USD/JPY is sticking to its bearish reversal and waiting for the US/Japanese 20-year yield differential (US10Y-JP10Y on the chart) to catch up.
We’ll have some key data released in the US next week, including inflation data on Thursday and jobs data on Friday, so I expect markets to be very focused on these. Momentum in markets is going to be determined by how these releases fit into the prospects of a softer Fed in December. If they fall in line, expect a weaker dollar throughout, allowing USD/JPY to break lower, possibly even dropping below 136 throughout the latter part of the week. This doesn’t mean we won’t see a rebound afterwards, because white frankly the dollar positioning heading into the actual meeting on December 14th is going to be very weak if it continues like this, meaning we may have room for a hawkish surprise and therefore a dollar rally on the day.
If, on the other hand, the data contradicts what we saw in October, or continues to show uncertainty about the state of the economy then we may see a dollar rebound on expectations that the Fed won’t be so easily convinced to turn dovish, meaning USD/JPY may break above this week’s high (142.25) on its way back towards 144.
USD/JPY vs US10Y-JP10Y (yield differential)
Similar to USD/JPY, much of the momentum for GBP/USD next week will be based on how the US data performs. The pair has been gathering bullish momentum for most of this week, partly due to the relief trade in UK assets and the weakness in the dollar. The issue now is that the rising wedge pattern has come into contact with the 200-day simple moving average on the upper bound, meaning resistance is likely to be strong around this area (1.2180).
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There is a lack of UK data next week so we may see GBP/USD struggling to find direction during the first half of the week, likely trending sideways with a possible bearish tilt as momentum corrects lower. Of course, the main catalyst for a move is expected to be the inflation and jobs data in the US, and we can expect the pair to cover a good amount of ground on the upside if the data comes in softer than expected. If this is the case, I wouldn’t be surprised if GBP/USD breaks away from the rising wedge heading towards 1.25, although it may find resistance between 1.2295 and 1.2665, the highs from August and May this year.
On the contrary, stronger-than-expected readings will fall in line with Powell’s hawkish remarks and see some dip-buying in the dollar, meaning GBP/USD will fall back within the rising wedge, likely finding some support along the lower bound of the pattern and 1.15.
GBP/USD daily chart
Again, focusing mostly on the upcoming data and how it may affect the dollar, EUR/USD could come under pressure if it remains below 1.04 throughout next week. In fact, a stronger dollar post-data could really damage the euro, which has been one of the strongest currencies against the dollar in recent weeks.
It’s going to be crucial to see some consolidation above its 200-day SMA (1.0386) if the pair wants to continue pushing higher, but for now, there seems to be some good resistance just below the 50% Fibonacci (1.0513) from the 1.1490 - 0.9536 drop. A weaker dollar will allow trying and tackle this area, which was last touched back in June this year, and possibly break higher towards resistance at 1.0610.
On the contrary, if selling pressure mounts then recent support at 1.0222 is unlikely to hold much longer meaning EUR/USD risks falling back into the ascending triangle pattern, which had capped gains at 1.0089. This would mean that the recent strength in the euro would weaken to the point that a drop back below parity (1.0000) could not be ruled out in the short term.
EUR/USD daily chart
18th November - US Dollar Weekly Outlook: Time for a recovery in the oversold USD?
US dollar attempts recovery from oversold conditions
After relentless selling in the US dollar following the softer-than-expected US inflation print. The greenback has attempted to fight back, having bounced off key support at 105.00 and keeping away from its 200DMA. Hawkish commentary from Fed officials, most notably Fed’s Bullard who stated that the Feds Fund Rate is not at sufficiently restrictive levels to lean against inflation has aided the greenback’s recovery. As I mentioned previously, I am leaning towards a mean-reversion in the USD and the fact that EUR/USD has failed to close above its 200DMA does provide some encouragement for this view. Now while we may have seen the peak in the US dollar, there can an expectation of some tactical upside, given that the greenback has been meandering in oversold territory. Alongside this, the Fed preferably want to see tighter financial conditions. As such, Fed officials have pushed back on the overreaction seen across the broader market with equities rallying following the most recent CPI print, which in effect is loosening financial conditions and thus is the opposite of what the Fed is trying to achieve. Elsewhere, for the technical analysts out there, the weekly USD candle is showing a doji pattern, which is often a sign of indecision, raising the probability of a reversal. Looking ahead to next week, there is little US data on the docket with only the FOMC minutes the event risk to watch out for.
Support: 104.90-105 (PPI lows/psychological support), 104.85 (200DMA), 104 (2020 peak)
Resistance: 107.30-40 (Aug 26th/Sep 13th lows), 108.90 (100DMA) 110.45-50 (pre-CPI level)
US dollar chart: weekly timeframe
Little Appetite to Chase GBP Higher
As expected the UK Chancellor’s Autumn statement highlighted the tough challenges that the UK economy will face in the next few years. Focus centred on the fact that households would see a record 7% drop in living standards. Meanwhile, the OBR judged that the UK is now in a recession this of course is largely in line with the Bank of England’s bleak forecast of the UK economy. As such, while the Pound has seen a sizeable rally in recent weeks to briefly break above the 1.20 handle, there is little appetite to look for more upside in GBP at current levels and instead, the currency is at risk of underperforming in the near-term against its counterparts. What’s more, while the latest CPI report showed inflation rising to a fresh 41-year high of 11.1%, markets remain split on whether the Bank of England will go ahead with a 50 or 75bps rate hike. On the technical front, the recent high in Cable has not been confirmed by the RSI, showing a bearish divergence and signalling topside exhaustion.
GBP/USD chart: daily timeframe
USD/CAD Unvalued as Oil and Rates Point to Higher Levels
The performance of the Canadian Dollar In recent sessions has largely been in line with most of its peers as the market participants unwind from their defensive long USD plays. Ultimately, this has been the key driver in USD/CAD with the pair falling from circa 1.36 to 1.32. However, what is noteworthy is that this move has occurred while short-term rate differentials remained relatively static at 50bps. Now while this might indicate that the predictive power of rate differentials has diminished in the near term, oil prices have also come under heavy selling with Brent crude futures currently on course for their largest weekly drop since March, down 9%. As such, risks are tilting to the upside for USD/CAD.
USD/CAD vs US/CA 2yr rate differentials & Brent crude oil (inverted)
Will EUR/USD go up or down next week?
Failure to close above its 200DMA provides encouragement for a mean-reversal.
Will GBP/USD go up or down next week?
Relief trading in UK assets keeps GBP/USD supported but the dollar will determine momentum next week