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Key Highlights

• The Euro corrected lower this past week and tested the 1.1610 support against the US Dollar.
• There is a key bullish trend line formed with support at 1.1620 on the 4-hours chart of EUR/USD.
• On the upside, resistances are seen near 1.1720, 1.1740 and 1.1750.
• Today in the US, the Retail Sales figure for June 2018 will be released, which is forecasted to increase 0.6% (MoM).

EURUSD Technical Analysis

The Euro started a downward correction after trading as high as 1.1790 against the US Dollar. The EUR/USD pair declined and tested the 1.1610-20 support area where buyers appeared.

Looking at the 4-hours chart, the pair remains in a decent uptrend from the 1.1510 swing low. The recent dip from the 1.1790 high can be seen as a correction. The pair traded above the 23.6% Fib retracement level of the last decline from the 1.1790 high to 1.1610 low.

On the downside, there is a key bullish trend line formed with support at 1.1620 on the same chart. Therefore, as long as the pair is above the 1.1610-20 support area, it could continue to move higher.

On the upside, there is a key resistance near 1.1720, which coincides with the 61.8% Fib retracement level of the last decline from the 1.1790 high to 1.1610 low. A push above the 1.1720 resistance may perhaps clear the path for more gains towards the 1.1750 level.

Should the pair gain momentum above the 1.1790 high, the next resistance could be the target near the 1.236 Fib extension level of the last decline from the 1.1790 high to 1.1610 low at 1.1830.

On the flip side, if the pair breaks the trend line and the 1.1610 support, there may well be extended declines towards the 1.1560 support.

Economic Releases to Watch Today

• US Retail Sales June 2018 (MoM) – Forecast +0.6%, versus +0.8% previous.
• US Retail Sales ex Autos June 2018 (MoM) – Forecast +0.4%, versus +0.9% previous.
• US Retail Sales Control Group June 2018 – Forecast +0.4%, versus +0.5% previous.

European Council President Donald Tusk and European Commission President Jean-Claude Juncker will meet with Chines Premier Li Keqiang in Beijing today for discussions on some practical topics. Ahead of the meeting European Commission spokesman Margaritis Schinas said the meeting will focus on "trade and investment, on the commitment to combating climate change and investing in clean energy and on foreign and security issues, including the situation on the Korean peninsula". And, the two sides will also talk on the joint commitment to the Iran nuclear deal.

Chinese Ambassador to the EU Zhang Ming wrote in an article in the official People's Daily, urging to deepen cooperation to address global challenges. In particular, he said both sides should "send out a positive message to safeguard multilateralism, liberalize and facilitate trade and investment." Zhang added that "Both of them recognize the necessity to firmly resist unilateralism and trade protectionism, guard the rule-based multilateral trading system with the WTO at its core, push economic globalization in the direction of becoming more open, inclusive, balanced and beneficial to all, reform multilateral trading system with the times, and perfect global economic governance system.

Italy's far right Interior Minister Matteo Salvini said on Sunday that the country is allowing some of the asylum seekers from Libya to disembark in Sicily. Prime Minister Giuseppe Conte set letters to head of state of other EU nations asking to share responsibility on the Libya migrants. In response, Germany, France, Spain, Portugal and Malta have agreed to take 50 people each.

"Spain will take in 50 of the people rescued yesterday in the Mediterranean. This shows our commitment to offer solutions to migration flows and solidarity with the humanitarian drama," Spanish Prime Minister Pedro Sanchez confirmed and tweeted.

EURUSD - The pair looks to extend its weakness after selling off on Wednesday. On the upside, resistance comes in at 1.1700 level with a cut through here opening the door for more upside towards the 1.1750 level. Further up, resistance lies at the 1.1800 level where a break will expose the 1.1850 level. Conversely, support lies at the 1.1600 level where a violation will aim at the 1.1550 level. A break of here will aim at the 1.1500 level. Below here will open the door for more weakness towards the 1.1450. All in all, EURUSD faces further upside pressure but with caution of a recovery.

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The Ichimoku trading indicator is well known for its capability of offering a complete trading system. This has been well documented, and trend following traders rely upon the Ichimoku’s indicators. However, various strategies can be developed using the Ichimoku’s different components as well.

One might argue on the merits of picking apart the Ichimoku trading system when it offers a complete strategy in the first place. While this might be true, the fact remains that the trader has to assess different variables when trading with the Ichimoku system.

This might lead to the trader either being left on the sidelines while a strong trend is formed subsequently. The result of this being that traders tend to ignore the rules and this is where mistakes start to prove costly.

By using just one component of the Ichimoku system, traders can keep their trading system simple and rely on just a few signals to validate their bias.

In this Ichimoku trading system, we rely on the Chikou span or the lagging indicator. Anyone who has traded using the Ichimoku system will know that the lagging indicator is basically the closing prices, shifted 26 periods behind price.

One of the Ichimoku trading rules also dictates that one of the scenarios to ascertain a bullish or a bearish trend is to compare the current price against price 26 periods ago.

Thus, when the Chikou span is above price, the market is said to be bearish, and when the Chikou span is below price, the market is said to be bullish. The logic is quite simple. A bullish trend emerges when the current price is above the price 26 periods ago and vice versa. We can, however, look at the Chikou span differently by comparing it to the price line itself.

In the first chart below, this concept is shown. The green line shows the Chikou span and the black line shows the price.

Trading with Chikou span and Awesome Oscillator

Combining the information with the Chikou span and the awesome oscillator creates a unique trading strategy. This method is not just simple but also allows traders quick reaction times to enter into a trend. The trading system is open-ended, meaning that traders can either continue to hold on to their positions until the trend starts to change, or traders can look towards booking profits at regular intervals.

The next chart below shows the set up that is quite simple. On the price chart, the Chikou span is overlaid while the Awesome oscillator sits in the sub-window.

The trading rules are quite simple.

• A bearish market is when the Chikou span cuts below the price line
• A bullish market is when the Chikou span cuts above the price line
• The AO also signals bullish market when it crosses above the zero-line
• The AO signals bearish market when it crosses below the zero-line

When you combine both these indicators and they are in-sync suggesting a bullish or a bearish market, traders can comfortably take long or short positions respectively.
Trading examples using the Chikou span and AO indicator

In the first example, we can see a bearish market signal in price. In the next chart, you can see that the Chikou span signaled a bearish market by crossing below the price line. The price candle marked by the arrow, signals when this occurs.

At the same time, we can also see that the AO is below the zero-line. Thus, both the indicators point to the decline in prices. Traders can set their stops at the recent swing high positions and based on this set the rewards of 1:2 and so on.

In the next example, we can see the bullish market signal in action.

In this example, we can see that the Chikou span crosses above the price line. The AO also signals the same information with the crossover above the zero-line. Thus, long positions are taken here with stops set to the recent pivot lows.

The above-mentioned strategy works best on the daily time frame but could be applied to the H4 chart as well. This trend following method requires some patience, meaning that traders will have to stay on the sidelines for a few days at a stretch.

However, since all other variables are cut off, the simplicity of this trading strategy will enable you to enter early into a trend. The risks are relatively small compared to the rewards that come out of this trading system.

When it comes to determining monetary policy, among a number of economic indicators that policymakers look at, one particular indicator stands out. Inflation or consumer price index has been one of the key factors when it comes to central bank policy responses.

If one looks back to the time since the 2008 global financial crisis, central banks have pumped trillions of dollars into the economy. This monetary policy response, dubbed Quantitative Easing initially evoked a lot of doubt among skeptics. Some even went as far as to question how long such a policy response would go.

However, the central bank’s QE policies have managed to revive the economy to a certain extent. Among the factors that the central bank considers, inflation ranks high. Interestingly though, inflation is not a standalone indicator and is in fact influenced by other components.

For example, the unemployment rate or the labor market plays a key role. If wages do not rise, how can consumers spend more? And when consumers do not spend more, how can inflation rise?

As you can see from the above, inflation although looks like a standalone indicator or a metric for the central bank takes into account the broader market.

What is the inflation targeting mandate?

Inflation targeting mandate is also known as a monetary policy regime. Here, the central bank sets an explicit target for the inflation rate in the short to medium term. It is widely publicized as well. A quick look at various central bank monetary policy statements will show the various inflation targets set by the respective central banks.

In the advanced economies, central banks follow a 2% inflation target rate. Examples include the United States Federal Reserve, the European Central bank and the Bank of England to name a few.

Other central banks set a target band to allow for more policy flexibility. For example, the Reserve Bank of Australia follows an inflation target band of 2% – 3%, while the Reserve Bank of New Zealand follows an inflation band of 1% – 3%.

Inflation or price stability is of importance to the central banks as they believe that maintaining the stability of prices is essential to the growth of an economy.

Based on how inflation fluctuates, central banks use this to respond to monetary policy. Raising interest rates is said to contain rising inflation and cools down the economy from overheating. Conversely, cutting interest rates is said to support an increase in inflation in an effort to kick-start the economy.

These cycles of policy tightening and easing are all based on inflation.

The inflation targeting regime was proposed by John Maynard Keynes.

Keynes recommended that exchange rate flexibility was needed as a response to inflation.

Prior to inflation targeting, central banks used to directly set the currency peg. However, it is public knowledge how especially in recent times central banks have failed to maintain the peg.

Examples include the Central Bank of Russia which eventually gave up defending the currency during the height of the Ukraine crisis. We also know about the Swiss National Bank eventually giving up the peg that it defended for years.

The RBNZ was among the first central banks in the world to shift to an inflation targeting regime in 1989.

Can the central banks manage to reach the inflation target?

After the 2008 financial crisis, central banks lowered interest rates and also started to pump money into the economy. This came at a time when inflation remained subdued across the globe. However, in recent times, inflation has started to pick up, most notably in the Eurozone.

For central banks, inflation targeting doesn’t mean raising rates when inflation reaches 2%, but rather monitoring the trends in inflation. Thus, when inflation starts to show a steady uptrend and edges closer to the inflation target rate, central bankers start to hike rates gradually as well.

For traders, inflation is often seen as a binary event for trading. While this might be true in the short term, understanding the inflation targeting regime can help traders to better speculate the potential central bank policy responses.

The currency markets revolve around interest rates, and the interest rates are set as a result of inflation.