Sample Category Title

USD/JPY slides amid risk-off move

The Japanese yen has been trading on a firmer footing since the beginning of the week as the tensions between North Korea and the United States keep escalating. The Japanese currency, which is fulfilling completely its safe haven role, surged as much as 1.70% against the greenback since Monday, sending USD/JPY down to 108.91 as of Friday morning. The currency pair is currently testing a key support area that lies at around 108/109 (multi lows and 50% Fibonacci on June- December 2016 rally). A break to the downside will open the road towards 106.52 as a first step (61.8% Fibo), then the key psychological support at 100.

From a technical standpoint, USD/JPY already failed to break the 108.84 support twice, there is therefore chances that the pair bounces back towards the 110. From a fundamental standpoint, the risk-off move is gaining traction across the globe, suggesting that the flight to safe haven is not done yet. Asian equities are down around 1.60% in average, while European ones are set to join the move. Volatility is surging with the VIX up to 16.21% and the VSTOXX hit 20.61% this morning. Therefore it would be a wise idea to wait out the storm before betting on a relief rally.

Gold gains momentum as investors take shelter

As we mentioned several times, geopolitical tensions were very calm this summer and investors were dropping gold which was very close to $1200 an ounce. Anyway, mounting tensions between North Korea and the US has shifted the short-term outlook for the precious metal which is now monitoring its 2017 high slightly below $1300.

Against this backdrop, there are also concerns that the Fed won’t likely deliver new rate hikes before year-end. On top of that the Trump’s inability to deliver its key reforms has send the dollar way lower. We believe that the dollar weakness is set to continue and will boost gold prices way higher.

Investors’ sentiment is now shifting towards risk-off. The VIX index, which indicates how investors value market risks has jumped towards 16 after hitting its all-time low below 10 last week. The equity markets seems vulnerable and gold is ready for a bullish breakout. Time is good to stash up a bit more of the yellow metal.

The President of the New York Fed maintained a relatively neutral tone in his comments yesterday. He said that inflation is likely to pick up soon, boosted by a tight labor market and the dollar's plunge. However, he noted that this progress is unlikely to show up in the yearly inflation rate until the recent weak monthly prints drop out of the yearly calculation, in roughly 6-10 months. USD dropped somewhat after his remarks, as they probably appeared dovish at first glance. However, we believe that these signals do not rule out the prospect of another rate hike this year. In our view, Dudley's comments imply that even though the yoy rate in inflation may remain below 2% for a while, the Fed could continue hiking as long as we get decent monthly prints. Thus, markets may keep their gaze locked on today's CPI data for July, as they could either confirm or disprove Dudley's view.

The forecast is for the headline CPI rate to have risen slightly, while the core rate is expected to have held steady. Such prints would be in line with Dudley's view and may thereby support the greenback somewhat. However, unless the core rate rebounds as well, we doubt that this data set will have much impact on market expectations for the timing of the next Fed hike.

EUR/USD traded somewhat higher yesterday after it hit support near the crossroads of the 1.1715 (S1) level and the short-term uptrend line taken from the low of the 23rd of June. As long as the rate remains above that line, we consider the short-term outlook to still be positive. Even if the US CPIs come as expected today and thereby support somewhat the dollar, we don't expect this to trigger a trend reversal. The bulls may take advantage of the mild slide and perhaps aim for another test near 1.1830 (R1). A clear break above that level could pave the way for another test near the 1.1900 zone. We believe that a decent rebound in the US core CPI rate is needed to cause the greenback to rally and bring a short-term trend reversal in EUR/USD.

RBA's Lowe takes a page from Wheeler's book; mentions FX intervention

Speaking overnight, RBA Governor Philip Lowe noted that a lower Australian dollar would help the economy to get back to full employment more quickly, something he does not expect to happen for at least 2.5 years. What's more, the RBA chief took a page from RBNZ Governor Wheeler's book, as he followed that comment with a reminder to investors that the RBA is prepared to intervene in the FX market in extreme situations. Even though he added that the Bank is not ready to intervene at the moment, his mere reference to intervention was enough to send the Australian dollar somewhat lower.

We believe that the outlook for the Aussie is neutral at the moment. Even though the Australian economy is humming along well, the RBA's recent AUD jawboning seems to be finally having some effect. We think that the currency's outlook could clear up next week, after the all-important wage data for Q2 are released. Given the RBA's continued concerns about subdued wage growth, we believe that these prints will probably determine whether the Bank is likely to turn hawkish anytime soon.

AUD/USD traded lower on Thursday, after it hit resistance at 0.7900 (R1). Now the rate is testing the 0.7840 (S1) support, where a dip could challenge the key territory of 0.7800 (S2) as a support this time. Although the price structure on the 4-hour chart suggests a short-term downtrend, the rate's proximity to the 0.7800 (S2) obstacle solidifies our view to remain sidelined for now. That hurdle acted as the upper bound of the sideways range that contained the price action from the 2nd of March 2016 until the 14th of July, and it may be proved a rebound point now that the rate is trading above it. We would like to see a clear close below that zone before we start examining the case for larger declines.

As for the rest of today's highlights:

Besides the highly-anticipated US CPI data for July, we also get Germany's final CPI for the month. However, given that the final print is expected to confirm the preliminary estimate, any reaction in EUR may be limited.

We have two speakers on the agenda: Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari. Both are voting members of the FOMC this year, but we think that market focus will fall mainly on Kaplan, as he will be speaking a few minutes after the CPI prints are released.

EUR/USD

Support: 1.1715 (S1), 1.1655 (S2), 1.1615 (S3)

Resistance: 1.1830 (R1), 1.1900 (R2), 1.1980 (R3)

AUD/USD

Support: 0.7840 (S1), 0.7800 (S2), 0.7710 (S3)

Resistance: 0.7900 (R1), 0.7950 (R2), 0.8000 (R3)

War of words gone in a different stage
CPI data will provide fruit for thought for the Fed

President Trump notched up the geopolitical uncertainty yesterday with his new comments 'may not be tough enough'. A tit for tat reaction is expected from North Korea and what investors are hoping for, is that perhaps there will be only words and no actions. The war of words has just gone into a complete different territory. China, the second biggest economy in the world, isn't prepared to have only one role in this, which is neutral.

The entire situation has created a major spike in the volatility and the option volume has surged to some eye-popping level. The VIX spiked nearly 45.5 percent yesterday which marks the 8th biggest gain for the index in history.

The risk-on mode is in full swing with investors piling their bets on the Japanese yen, the Swiss Franc and the yellow metal. Profit taking is the major theme when it comes to the equity market. The MSCI emerging market has witnessed some serious blood bath with investors jumping off the boat, and the index has suffered its worst loss since May.

Today is also the CPI economic reading day and investors are watching this number very closely since the European central bank, the Fed, hold all inflation data very dear to their heart. The CPI data out of Germany have matched the forecast but the euro has refused to pay any attention as the number failed to go beyond the consensus estimate. The ECB will have to take a very measured approach in the light of these numbers because a premature decision would have a cost which could be unbearable.

The Fed has played one beat when it comes to inflation, and the recent weakness in the inflation is transitory. Today's number will resolve that matter more adequately. The consensus is for a strong number of 1.8 percent from the previous figure. The core CPI number is not expected to move any muscle.

Russia faced tough sanctions during its conflict with Crimea and the sanctions cost dearly. But the country has shown that it has the ability to ward off those dark days. The country is expected to report the GDP reading for the last quarter and the forecast is for 1.7 percent. If the actual number matches the forecast, it would be the biggest annual increase in nearly three years. The good news does not stop there because this will be a third straight quarter of y/y growth.

Positive Britain's economic reports for June resulted in a solid jump in the GBP/USD exchange rate right after the data came in. Following the release, the Sterling rose versus the US Dollar by 16 base points to touch the 1.2981 level. The Office for National Statistics reported that the country's manufacturing output grew at the same pace as previously, while industrial production advanced unexpectedly over the month of June. The survey's results suggested that the manufacturing growth is likely to gain momentum in the third quarter, while exports would grow at a faster-than-estimated pace. Moreover, experts revealed that the economic expansion is likely to hold up sufficient growth pace in the second half of 2017 rather than decelerate.

As the US producer prices growth missed forecasts for July, the EUR/USD currency pair extended gains during Thursday's session. The Euro appreciated against the US Dollar by 0.06% to 1.2981 to begin a dynamically strong ascending trend. The Labour Department revealed that the US Producer Prices Index dropped 0.1%, compared with a 0.1% increase in June. The PPI marked the strongest fall since August 2016, affected by diminished services costs. Despite the weaker correlation between producer prices and consumer prices, the reported drop could raise concerns over the further deceleration in the inflation growth, which would delay the next interest rate hike. In this regard, the Federal Reserve is more likely to raise rates no sooner than in December.

The yellow metal's price has broken past the 1,280 mark, which managed to hold off the metal for a couple of hours.

On Friday morning, an ascending pattern was noticed. It can be mapped by connecting the high levels of early August 8 trading hours and the early high level of August 10. In that way the resistance line can be observed. However, the possible support line of a channel might be pinpointed by setting the parallel line at the August 8 low level.

In the meantime., it can be observed on various charts that there are no notable resistance levels until the 1,290 mark.

Downside risks prevailed on Thursday, thus resulting in a 114-pip plunge in one day. The pair breached the lower boundary of a three-week channel and, consequently, edged below the weekly S2 at 109.33. The given move has formed a more steeper channel down. The downside momentum has allayed, giving room for some upside potential that may be realised in this session. The given assumption that the US Dollar may appreciate against the Yen today is supported by technical oscillators being in the oversold territory and other indicators—at historical lows. Nevertheless, down-trend is still strong. The nearest support formed by the monthly S1 and the weekly S1 at 108.81/82 could be an unbreakable limit, thus guiding the pair towards the upper boundary of the junior channel circa 109.40.

GBP/USD remained between the weekly S1 and the 100-hour SMA on Thursday, thus providing two additional confirmations of a descending triangle. The exchange rate managed to bounce off the short-term down-trend this morning; however, the lack of volatility demonstrates trader indecisiveness towards the pair. As the rate has entered a consolidation phase, it is rather unclear to which direction the Pound is set to go. Bearish technical indicators are signalling to a possible recovery that may lead the Sterling towards the 1.3020/40 area. Alternatively, the aforementioned triangle may be respected, thus setting the British currency down to the weekly S1 at 1.2953. Given the characteristics of this pattern, the weekly and monthly S1s should be breached to the downside.

The previous long term support line continued to provide resistance to the currency exchange rate in the previous trading session, as it stopped a rebound of the EUR/USD pair.

On Friday morning the currency pair was declining after the encounter of the just mentioned resistance line. It was about to face the support of the 55-hour SMA, which as located near the 1.1750 mark.

Meanwhile, the main focus should be on the fact that an ascending channel pattern was revealed during Thursday's trading session. The pattern's lower trend line provides guidance for the ones, who want to know, where a rebound will occur.

EUR/USD

Current level - 1.1763

Yesterday's rise to 1.1784 should be considered the final leg of the consolidation pattern above 1.1687 and my outlook is bearish, for a sell-off towards 1.1580 area.

USD/JPY

Current level - 109.15

Allow a brief intraday consolidation below 109.50, before another slide towards 108.10 zone.

GBP/USD

Current level - 1.2982

The consolidation pattern above 1.2930 is still underway, but my outlook remains bearish, for a break on the downside, towards 1.2810 zone. Key resistance lies at 1.3050.