FOREX PRO WEEKLY, 04 - 08 September, 2017

[Sive Morten]

Good morning,

(Reuters) - The euro held firm on Thursday ahead of a European Central Bank policy decision, with the focus on what the ECB might say about the currency’s recent strength and how that may influence the policy outlook.

The euro edged up 0.1 percent to $1.1925, still some way off last week's high of $1.2070, its highest level since January 2015.

The common currency has lost some momentum since hitting that 2-1/2 year peak, weighed down by rising expectations that a stronger euro could slow the ECB’s plans to rein in its bond-buying stimulus.

Only 15 of 66 economists polled by Reuters expect the ECB to announce a reduction of its monthly asset purchases at Thursday’s ECB policy meeting -- a sharp reversal from a month ago when slightly over half of respondents expected such a move.

ECB President Mario Draghi is set to start laying the groundwork for stimulus reduction at Thursday’s meeting, but will probably hold off on any major commitment.

One focus is whether Draghi will express any reservations about the recent strength in the euro, which has gained more than 13 percent against the dollar this year.


Jasslyn Yeo, global market strategist for J.P. Morgan Asset Management, said it wouldn’t be surprising to see Draghi raise concerns about the euro’s strength, which will exert downward pressure on euro zone inflation.

That would force the ECB to take a slower approach toward policy normalisation, and the euro looks susceptible to a pull-back against the dollar in the near-term, Yeo said.

“Markets have become too optimistic on the continued recovery in euro area growth,” Yeo said, adding that markets also seemed to be taking an overly pessimistic view of recent weakness in U.S. inflation data.

The euro could rally if the ECB and Draghi refrain from commenting on the currency’s rise, said Tareck Horchani, head of sales trading in Asia Pacific for Saxo Markets in Singapore.

On the other hand, if they do express concerns and the euro sells off, the common currency will probably find support in the $1.17 to $1.18 area, Horchani said.

LOONIE LIFTS OFF
The Canadian dollar last traded at C$1.2229 per U.S. dollar, taking a breather after rallying on an interest rate hike by the Bank of Canada.

On Wednesday, it had scaled a high of C$1.2140, its highest level since June 2015, after the Bank of Canada surprised many by raising interest rates. Most analysts had expected the bank would wait until October to raise rates.

The U.S. dollar eased 0.2 percent to 109.05 yen, but remained above a one-week low of 108.45 yen set on Wednesday.

Although the dollar gained a lift on Wednesday, helped by relief over U.S. President Donald Trump’s surprise deal with the Democrats on extending the debt limit, lingering concerns over North Korea related tensions may limit the dollar’s upside versus the Japanese currency, said Saxo Market’s Horchani.

Trump agreed with Democrats in Congress on Wednesday to extend the U.S. debt limit and provide government funding until Dec. 15, potentially avoiding an unprecedented default on U.S. government debt.

So at the eve of ECB as EUR as CHF shows minor changes. On daily chart, technically our bullish grabber is still valid, market shows no response to it for a long time - more than 4 days as it was formed even on last week. Besides, here we have clear bearish divergence with MACD right at strong monthly resistance area. Taking in consideration recent CFTC data on EUR - it has limit upside potential. That's why if you think about taking long position, may be it is reasonable to wait for meaningful bounce down as it could happen even today:

Another reason why I think that downward action is very probable today is situation on intraday charts - current action is too choppy and definitely is not a thrusting action that we need. Hence, this is response on previous drop, just retracement after it. That's why appearing of butterfly and moving to 1.18 looks probable:

Besides, as on CHF as on Dollar Index charts we have bullish setups. In such circumstances logic suggests at least do not go long on EUR right now. Because the only hope that we have is Draghi hawkish speech:

Here is dollar index:

Thus, taking in consideration technical picture, saturated CFTC position on EUR, it seems that better to wait Draghi release. If any drop will happen - it will be much better area and moment for taking long position on EUR.

 

[Sive Morten]

Good morning,

(Reuters) - The euro reached a 2-1/2-year high versus the dollar on Friday, as a policy meeting by the European Central Bank gave bulls cause for short-term optimism and did little to support the beleaguered U.S. currency.

Asked when the central bank will decide on potential policy tapering, ECB President Mario Draghi said on Thursday the bulk of these decisions will probably be taken in October. That was enough to make euro bulls upbeat on the single currency’s near-term outlook.

But Draghi also said the ECB must take into account the weakening of inflation owing to the strong euro, with the central bank having opted to lower some of its inflation projections to reflect a firming common currency.


Furthermore, the ECB reaffirmed its ultra-easy policy stance by retaining rates at record lows, even keeping the door open to increasing bond purchases if needed, despite the euro zone’s best economic run since the global financial crisis.

“A large part of the euro’s gains is being driven by expectations towards ECB tapering. The market did not get the confirmation it expected regarding tapering, but it remains far from disappointed,” said Bart Wakabayashi, branch manager for State Street Bank and Trust in Tokyo.

“If euro strength is to continue, this may actually prompt the ECB to refrain from tapering. But as demonstrated time and time again, the market tends to get ahead of itself.”

The euro was up 0.4 percent at $1.2069 after touching $1.2090, its highest since January 2015. It has gained 1.7 percent on the week.

Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo, said the euro “was bought on mention of tapering possibly starting in October. But the ECB sounded rather dovish overall and the euro probably should have been sold in response, particularly with German bund yields having fallen.”

“But the euro still managed to gain, thanks to the dollar’s underlying weakness,” he said. “The dollar is under pressure from many fronts ranging from sluggish inflation, Trump risk and geopolitical concerns.”

Against the yen and sterling, the euro’s gains were more modest. It was a shade higher at 130.570 yen after rising 0.2 percent overnight.

The euro was up 0.25 percent at 92.00 pence, putting it about 0.4 percent stronger for the week.

Compounding problems for the dollar, risk aversion took hold as the broader markets braced for North Korea celebrating its founding on Saturday, and as powerful Hurricane Irma headed for Florida after wreaking havoc in the Caribbean.

The dollar was down 0.2 percent at 108.235 yen after dropping 0.7 percent overnight when it briefly touched a 10-month low of 108.050.

The Swiss franc gained 0.5 percent to 0.9458 per dollar .

The dollar index against a basket of six major currencies was down 0.5 percent at 91.210 after going as low as 91.082, its weakest since January 2015 and on track for a 1.8 percent weekly loss.

The U.S. currency also felt pressure as long-dated Treasury yields fell to 10-month lows. U.S. jobless claims data and worries about the impact of hurricanes Irma and Harvey on the world’s largest economy stoked safe-haven demand for government debt.

U.S. yields were further pressured by declines in German government bond yields after the ECB lowered its inflation forecast.

The Australian dollar rose to $0.8099, its highest since May 2015 and was last up 0.5 percent at $0.8096 against the broadly weaker dollar.

The New Zealand climbed 1.1 percent to $0.7305, on the dollar weakness and a rise in the country’s second quarter manufacturing sales as well as higher volumes for dairy and meat products.

Draghi speech yesterday has made solid impact on markets across the board. Today we will take at AUD, because here we also have long-term setup that we do not mention through the week. If you remember, major monthly target on AUD stands around 0.8160 area and market hardly will show major retracement or reversal prior it will be hit.
It means that although our daily butterfly looks perfect and price reached daily OB level - it is not the end yet probably. That's why we expect some minor retracement today and in the beginning of the next week, but upside should continue. It means that daily 1.618 extension should be completed around 0.8220 area:

On 4-hour chart price also has completed inner AB-CD target. There are two levels that are suitable as retracement target. First is 0.8050 and 0.80 K-support area. Currently it seems that 0.8050 should be enough as it is also previous top, but, 0.80 is just 30% retracement, so it will be no tragedy if market will reach it. Besides, aussie stands at daily OB, thus, retracement indeed could be a bit deeper:

Meantime on daily chart we could get some DiNapoli directional pattern - either B&B or DRPO "Sell". Thrust on hourly chart looks nice:

That's being said - today and in the beginning of next week we expect to see minor bounce down as respect to butterfly target and daily OB. But later price has chances to go higher to 1.618 daily butterfly target and completion of major monthly AB-CD objective point around 0.8160.

 

[Venelin]

Hi Sive, On Daily and Weekly USD/CAD we have a Strech pattern-combination of oversold and 50% fibo-major level. What would be the target on a long position-would it be the middle of oscilator lines or 50% fib. from the swing down, or some other level? Thanks!

 

[Sive Morten]

Hi Sive, On Daily and Weekly USD/CAD we have a Strech pattern-combination of oversold and 50% fibo-major level. What would be the target on a long position-would it be the middle of oscilator lines or 50% fib. from the swing down, or some other level? Thanks!

Hi Venelin,
Here we have butterfly "Buy" as well. But taking in consideration the speed of this collapse, I would consider just minor 3/8 bounce of butterfly action. At least initially...