Morning Report: USD Profit Taking On Wage Growth Concerns

KEY DATA RELEASES TODAY:

1740GMT USD FOMC Member Lockhart Speaks

OVERNIGHT:

Relatively quiet start to week with the USD marginally offered against the majors after Friday’s jobs report. The DXY has retraced from last week’s multi-year high of 92.49 and now sits around the 91.75 mark. Likely a function of positioning and somewhat more attention being attributed to the weak average hourly earnings component. Generally the report was solid, and confirmed what we already knew, notably that the labour market is strong, but risk for inflation is probably to the downside.

Majority of US Primary Dealers still see June Fed hike after US jobs report. A Reuter’s poll of 20 primary dealers released late on Friday showed that 13 out 20 feel the Fed will commence the tightening cycle at their June meeting. A large majority of those polled felt that continued weakness in the crude oil price will not deter the Fed from hiking rates. The median forecast of 21 dealers for the federal funds rate at the end of next year was 0.875%, slightly lower than a December poll. The poll was taken after the US non-farm payroll data which showed Weekly Hourly Earnings unexpectedly fall. The USD fell and US yields moved lower following the data, as a number of traders believed the Fed will be hesitant to start a tightening cycle while wage growth was stalling or moving backwards.

USDJPY opened the Asian session at 118.52 after falling during the US session on Friday when US yields moved lower in response to the weak average hourly earnings component of the US NFPs. USDJPY weakness continued in early Asia with the paring trading down to 118.12 at one stage before reported standing Japanese buy orders ahead of 118.00 discouraged attempts lower. The move was in line with broad USD weakness, as the reaction to the US employment report continued to resonate in early trading. The USD found its feet again later in the morning and USDJPY drifted all the way back to 108.51 before heading into the afternoon session at 118.40. USDJPY has stopped trending higher and appears to be in the midst of a correction lower.

EURUSD opened the Asian session at 1.1845 after getting support on Friday from a move lower in US yields following the disappointing fall in the average hourly wage component of the US NFPs. EURUSD traded to 1.1835 in early Asia before broad USD weakness set in. Small stops were triggered above 1.1855 to 1.1870 before sellers returned and the USD found its feet again. EURUSD drifted back to 1.1855 heading into the afternoon session. EURUSD is unlikely to make too much ground ahead of the ECB meeting Jan 22 and the Greek elections three days later. There are some doubts creeping in as to the extent of the ECB QE efforts, as Germany will likely resist full blown QE without a few caveats and qualifications. The Syriza Party remains ahead in the opinion polls and the political uncertainty and ramifications of a Syriza win should continue to cap EURUSD rallies.

Looking forward to the week ahead, we have UK CPI on Tuesday. On Wednesday, the ECJ gives their advice on the ECB’s OMT mechanism. Wednesday also sees Eurozone industrial production and US retail sales. We end the week on Friday with Eurozone and US CPI as well as US industrial production.

OVERNIGHT PRICE ACTION:

EUR: 1.1750 supports 1.19 first resistance ahead of key 1.20 level
GBP: Descending trendline support holds, remain bearish below 1.54 3 month range lows
JPY: Trend line support eroded, potential for snap back into channel
CAD: Pin bar rejection of ascending trendline resistance, but bullish consolidation persists
AUD: Psychological 0.80 level targeted, while below 0.83 trendline resistance

KEY TRADES:

FX PairShort TermPosition/DateEntry LevelTargetStopComments
EURUSDBearishAwait new signal
GBPUSDBearishAwait new signal
USDJPYBullish BUY/06 JAN 119.50 OPEN118.00
USDCADBullishSELL/08 JAN 1.18 OPEN 1.19Counter Trend
AUDUSDBearishAwait new signal

ANALYSIS:

EURUSD Short Term (1-3 Days): Bearish  – Medium Term (1-3 Weeks) Bearish 

  • 1.1750 and descending trendline support hold on first test resistance now at 1.19 and trend channel resistance
  • Order Flow indicators; OBV ticking up from recent extremes, Linear Regression and Psychology testing midpoints from below
  • Watching price action for short entries at retest of 1.19/20 area from below

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GBPUSD: Short Term (1-3 Days): Bearish  – Medium Term (1-3 Weeks) Bearish

  • Descending trendline support remains in tact for now 1.50 first downside objective while resistance 1.53 holds
  • Order Flow indicators; OBV consolidating at lows, Linear Regression and Psychology ticking up to test midpoints from below
  • Monitoring price action to reset shorts against 1.53 targeting 1.50 test initially

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USDJPY: Short Term (1-3 Days): Bullish  – Medium Term (1-3 Weeks) Bullish

  • Trend line support eroded, caution on snap back, next support at 116.50 area resistance at 120.00
  • Order Flow indicators; OBV consolidating at highs, Linear Regression and Psychology rotating at midpoint
  • Look to reset longs on snap back into bullish channel or at next horizontal support area.

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USDCAD: Short Term (1-3 Days):Bullish  – Medium Term (1-3 Weeks) Bullish

  • Pin bar rejection of topside projected trend channel resistance but bullish consolidation continues and threatens break of ascending trend channel resistance
  • Daily Order Flow indicators; OBV consolidating at highs, Linear Regression pulling back to test midpoint from above and Psychology rotating at midpoint
  • Tactical short trade in play. please see key trades

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AUDUSD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish

  • Psychological 0.80 remains downside objective while descending trendline resistance at 0.83 remains intact
  • Order Flow indicators; OBV consolidating at lows, Linear Regression and Psychology bullish
  • Monitoring resistance at 0.83 to set short positions targeting break of 0.80

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