With little by way of data and thin market conditions due to a US holiday, there were some traders capitalising on levels being slightly easier to break than normal and with the stock market performing poorly due to the bleaker global fundamental outlook and reduced stimulus from the Fed, it was the safe haven flow that dominated the market. With the Nikkei 225 starting the week having already broken below the daily ichimoku kumo, the JPY% index rallying through resistance after rejecting key support last week and the Fed signalling a potential hesitation for the rate hike there was only one way the market could go and the one way street of USDJPY buying changed direction at long last. The rest of the market buckled in response to this and EURUSD rallied through key resistance, possibly aided by the growing tension between Buba president Weidman and the ECB chief Draghi, who unsurprisingly don’t see eye to eye regarding sovereign QE, which may turn into a potential roadblock for the application of such stimulus.
On the data calendar for Tuesday we have UK CPI which could be quite pivotal for the near term outlook for the pound. A number closer to the 2% target than the current 1.5% and we could see the pound become the best looking horse in the bubblegum factory and as such rally from these critical support levels. A further drop and the fear that the UK has caught the low inflation bug from it’s neighbours over the channel and we’ll see downside.
German ZEW and European industrial production will also be a significant releases in these uncertain times as news volatility is likely to increase.
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We failed to convincingly break above the cluster of moving averages when we pushed back inside the bullish channel (followers of my twitter will have had this level pointed out in real time) and as such we have dropped lower as traders take profit on their USD long positions, with USDJPY and EURUSD the most likely candidates for consolidation due to their strong trends recently. I’m not yet a dollar bear since it seems likely that once we retest the recently broken multi-year high level which will now act as support that we will find some more dollar bulls eager to jump in, although quite how bullish this reaction is will be very telling. A failure to break a fresh high could signal a more protracted period of dollar consolidation, even if the longer term dollar outlook is bullish. I am neutral USD% in the short term, bullish long term
USD% Index Resistance (EURUSD support): EURUSD 1.2723, 1.2667
USD% Index Support (EURUSD support): EURUSD 1.2766, 1.2800
Does this spike higher and break of bearish channel suggest a lack of belief in European sovereign QE? or will we simply drop lower once resistance is tested? its too early to call really, although it seems prudent to not position too bravely when entering new positions at the moment until there is more clarity. Certainly the price action is less bearish but until we start to make a higher high for the euro then this should still be considered a down trend. It also seems possible that EURGBP is partly to blame here with quite marked gains in the cross when EURUSD broke resistance. With UK CPI on Tuesday though this could all change if we get a good UK CPI number and poor EUR data. EURUSD 1.2800 is now the line in the sand to start rethinking near term Euro strategy. I am neutral EUR% in the short term, bearish long term
EUR% Index Resistance: EURUSD 1.2794, 1.2800
EUR% Index Support: EURUSD 1.2700, 1.2665, 1.2561
Another big day for the Yen as the Nikkei 225 continued lower without even the ability to retest the recently broken support at the bottom of the daily Kumo (orange lines). The downward trajectory there is neatly captured by a bearish trend channel and it seems the Nikkei will remain a neater proxy for the yen while we have such stock market volatility. Clearly there will be traders who find it a struggle to adjust to a bullish Yen once again which could make USDJPY rather messy. JPY% index support comes in at USDJPY resistance 107.61. I remain bullish JPY% but only if stock don’t rally
JPY% Index Resistance (USDJPY Support): USDJPY 106.61, 106.37, 105.63
JPY% Index Support (USDJPY Resistance): USDJPY 107.61, 107.75, 108.00
Very interesting to see this dollar weakness not translate into GBP upside. Carney has been on the wires stating that the reduced global outlook would push back the timetable for rate hikes and the market may now be taking stock of the pound and it’s relation to the dollar. However it makes no sense at all for EURGBP to be rallying currently on a medium to longer term time-scale. Sure enough some hedge funds favour the Euro over the pound due to the very dovish stance of the UK in QE terms and the unlikeness of QE in Europe due to German Buba tantrums, but the fundamentals of economic indicators simply don’t back that up. Europe is in a disorderly mess and the UK is in a well patched over and neatly maintained mess, which by sheer slight of hand is a more convincing situation. Until the price action backs up my market view or my market view changes I will remain sidelined for the Pound. GBPUSD 1.6000 remains key support. I am neutral / bullish GBP%
GBP% Index Resistance: GBPUSD 1.6134, 1.6214
GBP% Index Support: GBPUSD 1.6100, 1.6060, 1.6000
As suggested in my Sunday night analysis the Aussie rallied from the red trend line support although quite what happens now is far from clear. We have an expanding triangle; the universal sign of market confusion and we could go either way so the range will now be defined by the red trend lines and the break either way the medium term decision for trend direction. To the downside we don’t have far to go before major support once again in the AUDUSD 0.8550 region. I am neutral / bearish AUD% until we break the expanding triangle
AUD% Index Resistance: AUDUSD 0.8782, 0.8937
AUD% Index Support: AUDUSD 0.8656, 0.8
The Franc has been less bearish than the Euro for obvious reasons which has pushed us close to the EURCHF SNB floor although if the SNB are to be believed they have not intervened recently. We have pushed right up to key trend channel resistance for the Franc so unless the dollar can continue to sell then this would be a perfect place to enter a long USDCHF position were the fundamentals less foggy. As it is, we are left with a lot of fog and uncertainty regarding rate hikes and an overinflated dollar reliant on the rate hikes for continuation of the trend. The Fed have said all along too that a reintroduction of bond buying if market conditions worsen is a possibility too. This makes the risk of a break here very real, especially considering the flight to safety and the fact that the ECB may struggle to pass sovereign QE as a policy tool. I am neutral / bullish CHF%
CHF% Index Resistance (USDCHF support): USDCHF 0.9450, 0.9400
CHF% Index Support (USDCHF resistance): USDCHF 0.9500, 0.9530, 0.9580
LittlefishFX Relative Currency Index Strength
All of the currency indexes used for this analysis are available as a NinjaTrader indicator from the link below. They are eight indexes, USD, EUR, JPY, GBP, AUD, CHF, CAD and NZD with each index made up of the remaining seven pairs, weighted in accordance with the distribution of global FX volume as measured by the Bank of International Settlements in their Triennial Survey.