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USD consolidates gains, EM currencies bounce back

After rallying aggressively since the beginning of the week, the greenback retreated against most of its peers as investors took a breather to assess the dollar’s outlook. The dollar index rallied as much as 1.16% since Monday morning and hit 99.68, thanks to a sharp debasement in the CHF (-1.80%), the JPY (-1.10%) and the EUR (-0.95%). Emerging markets were also badly hit with the TRY, PLN and ZAR falling 1.80%, 1.25% and 1.05% respectively. Despite this temporary setback for the greenback, we remain dollar positive as we believe the market is not done pricing in the upcoming rate hike by the Fed (implied probability for an upside move, extracted from the Fed funds futures, stands at 95.3%).

Emerging market currencies are on the front line, especially after the rise of downward pressure in commodity prices, which was mostly triggered by worries over China’s economic outlook. This morning, Asian EM have had a hard time keeping their heads above water, with the exception of the South Korean won that rose 0.30%.

Across the Pacific, USD/BRL continued to trade within its uptrend channel and is currently testing its 200dma that stands at around 3.2147. The publication of April’s inflation data will most likely leave investors unmoved. Headline inflation is expected to come in at 4.10% y/y, down from 4.57% in March, which would make it the lowest read since July… 2007, when it stood at 3.74%.

The BCB has been cutting the Selic aggressively since October last year and has even speeded up the process recently by cutting it 1% down to 11.25% in April. This is rather good news for the Brazilian economy as it gives a breath of fresh air on the credit side. Unfortunately, this move will make the Brazilian real less attractive for carry traders, which explains why the real has begun to reverse gains starting mid-March. USD/BRL closed Tuesday’s session at 3.1894 and is expected to open slightly lower this afternoon as the USD consolidates gains.

Gold is still suffering as risks fade

Since mid-April, gold has continued to decline and it is now around its lowest level since March. This comes as the French election fears have now faded and also recession risks have seemed to be lower for some time.

There are a few things to be said anyway though. First data from the first quarter of the US economy has clearly been mixed in terms of growth and car sales. Recent data was better, such as non-farm payrolls which printed above 200k for April and the unemployment rate fell to 4.4%. As a result, we believe markets are buying back the Fed storytelling about the rate path. President Trump is less and less at the centre stage of the markets and the Fed is clearly back in.

In Europe, the French elections provided uncertainties but it seems that as Emmanuel Macron’s victory was even larger than expected, this removed it all. Fading European political uncertainties are also sending gold lower.

Technically-wise, the yellow metal should likely monitor the $1200 level. In case of a bearish breakout, we could see gold back towards levels of around $1150.

EURUSD

The EURUSD continued its bearish momentum yesterday bottomed at 1.0863. The bias remains bearish in nearest term testing 1.0850 key support which is a good place to buy with a tight stop loss as a clear break and daily close below that area would expose pre-gap level at 1.0730 and retesting the trend line support as you can see on my H1 chart below. Immediate resistance is seen around 1.0905. A clear break above that area could lead price to neutral zone in nearest term testing 1.0950 or higher. Overall I remain neutral.

GBPUSD

The GBPUSD was indecisive yesterday. The bias is neutral in nearest term. Immediate resistance is seen around 1.0965. A clear break above that area could trigger further bullish pressure testing 1.3000 – 1.3050 area. Immediate support is seen around 1.2900. A clear break below that area could trigger further bearish pressure testing 1.2865 area which is a good place to buy with a tight stop loss. Overall I remain bullish based on the double bottom formation on daily chart after bounced off 1.2000 support in January 16.

USDJPY

The USDJPY continued its bullish momentum yesterday topped at 114.32. The bias remains bullish in nearest term testing 115.00 as a part of the bullish continuation scenario after broke above the trend line resistance as you can see on my H4 chart below. Immediate support is seen around 113.40. A clear break below that area could lead price to neutral zone in nearest term testing 112.90 support area which is a good place to buy with a tight stop loss.

USDCHF

The USDCHF continued its bullish momentum yesterday topped at 1.0090. Price broke above the trend line resistance as you can see on my H4 chart below suggests a bullish outlook. The bias remains bullish in nearest term testing 1.0170. Immediate support is seen around 1.0020. A clear break back below that area could lead price to neutral zone in nearest term as direction would become unclear. Overall I remain neutral.

The pair is consolidating around 114.00 handle following Tuesday's strong rally that peaked at 114.31and closed above 113.75 pivot (Fibo 76.4% of 115.49/108.11 descend.

Dips from 114.31 peak were so far shallow and found support at 113.60, as overall picture remains firmly bullish and favors further upside for test of next strong barrier at 114.62 (Fibo 61.8% of 118.65/108.11 descend), break of which and weekly close above it would add to existing bullish bias.

Caution on overbought daily RSI which is turning lower and bearish divergence on overbought slow stochastic that may signal stronger correction.

Extension below 113.46 (Fibo 38.2% of 112.07/114.31 upleg) would generate stronger bearish signal and risk test of 100SMA (113.06).

Extended dips should find support above daily clod top (112.79) to keep overall bullish structure intact.

Res: 114.11, 114.31, 114.62, 114.87
Sup: 113.60, 113.46, 113.06, 112.79

'The dollar slid on Wednesday and the perceived safe-haven yen gained after U.S. President Donald Trump abruptly fired FBI Director James Comey in a move that shocked Washington and piqued investors' aversion to risk.' – Mansoor Mohiuddin, NatWest Markets (based on Bloomberg)

Pair's outlook

On Wednesday morning the common European currency was regaining some of its losses against the US Dollar, as the currency exchange rate traded just below the 1.09 mark. The currency pair was still set to decline down to the strong support cluster below it. The cluster consists of the weekly S2 at 1.0833, 20 and 200-day SMAs at 1.0830 and the 38.20% Fibonacci retracement level, which is located at the 1.0826 mark. However, before that cluster is reached the rate might surge to the resistance put up by the weekly S1 at 1.0916.

Traders' sentiment

SWFX traders have not changed their opinion since Tuesday, as 39% of open positions are long and 54% of trader set up orders are to sell.

'The improved optimism regarding the macro fundamentals are supportive of a stronger US dollar in the current circumstances.' – London Capital Group (based on Investing.com)

Pair's outlook

The market was indecisive on Tuesday due to lack of strong movers. The Pound found support at the 200-hour SMA mid-day, giving the confirmation that upside risks should prevail in this trading session. The pair may find resistance at 1.2982/90 by the lower boundary of the broadening wedge apparent on the hourly chart. This is the likely upper limit for today, as the closest resistance on the daily chart formed by the weekly R1 at 1.3037 may be too far to reach. Strong fundamentals for the Dollar may weaken the rate or even reverse it to the downside. In this case, the price should close in the 1.2938/1.2882 territory.

Traders' sentiment

Market sentiment has remained unchanged, as 51% of traders are holding short positions. Meanwhile, 58% of pending orders are to buy the Pound.

'With this [expectations of the newly-elected South Korean President to negotiate with North Korea] in the background, as well as the present uncertainty in the U.S., the dollar will trade heavily today below the 114-yen level.' – Daiwa Securities (based on Reuters)

Pair's outlook

The US Dollar outperformed the Japanese Yen for another day yesterday, adding more than 70 pips, but still unable to close above the 114.00 mark. Technical studies keep suggesting the Buck is to post more gains, but the immediate resistance area around 114.15, formed by the weekly and the monthly R2s, could prevent the USD/JPY pair from edging higher today. As a result, risks are skewed to the downside, with the weekly R1 at 113.47 being the nearest possible support. On the other hand, a boost from fundamental and political factors could provide the Greenback with sufficient bullish momentum to climb over the immediate resistance and approach the 115.00 mark.

Traders' sentiment

There are now 65% of traders holding short positions (previously 63%), whereas 54% of all pending orders are to sell the US Dollar.

'We think that gold's slide could perhaps extend to $1,180 to $1,200, an area of good technical support.' – Edward Meri, INTL FCStone (based on Reuters)

Pair's outlook

Although the yellow metal had passed the support cluster near the 1,220 mark on Tuesday, it traded back above it on Wednesday morning. The reason for the sudden rebound, which occurred late in the Tuesday's session, was the slight decline of the US Dollar caused by US President Donald Trump firing the Director of FBI. However, the yellow metal is still set to decline, and yesterday's move showed that the support cluster can be passed. Due to that it is assumed that the cluster at 1,220 will be passed and the bullion will decline down to the weekly S1, which is located at the 1,212.68 mark.

Traders' sentiment

Traders remain neutral on the metal. However, 65% of SWFX trader set up orders are to buy the metal.

The USD/CAD has formed a contracting triangle in the uptrend, signalling for a potential retracement. At this point traders should pay attention to two possible breakout points. A breakout to the upside could happen at the break of 1.3742 level (D H3 and Upper triangle trend line) while a breakout to the downside could happen if 1.3695 breaks (D L3 and Lower triangle trend line). The point where trend lines cross camarilla pivot point is called an X Cross. Target for the upside breakout is 1.3800 while the target for the downside breakout is 1.3635.

However as the price is generally in uptrend, if 1.3635 is hit, we could see another push to the upside targeting 1.3695 and 1.3800.

Fresh strength emerged after yesterday's downside rejection at 1.2900 and failure to clearly break below daily Tenkan-sen/10SMA supports at 1.2908/14. Morning Doji Star reversal pattern is forming on daily chart, as today's rally regained Monday's multi-month high at 1.2987 and is pressuring psychological 1.3000 barrier. Overall bullish structure remains intact after shallow Mon/Tue correction was contained by initial supports and sees scope for further upside. However, overbought slow stochastic on both daily and weekly charts requires caution, as falling thick weekly cloud weighs (cloud base lies at 1.3088). Repeated failure at 1.3000 barrier would signal extended consolidation, as the pair is eyeing tomorrow's BoE monetary policy decision for stronger signals. Alternatively, break below 10SMA/daily Tenkan-sen would weaken near-term structure and risk stronger correction.

Res: 1.3000, 1.3050, 1.3088, 1.3146
Sup: 1.2939, 1.2914, 1.2908, 1.2862

ECB Governor Draghi will make a speech in the Dutch Parliament at 12:00 BST today. It will be Draghi's first speech after the French election so traders should be aware of any comments on the Eurozone's economic outlook or hints of a possible gradual removal of QE.

Thursday May 11th is a crucial day for GBP traders with the release of a series of UK economic data at 09:30 BST. Followed by the the Bank of England's (BoE) interest rate decision and monetary policy minutes at 12:00 BST and the NIESR GDP estimate (Feb to April) at 13:00 BST.

Recent UK economic data has been soft, lowering market expectations for a rate hike. The general election will be held on June 8 and, with the Brexit procedure ongoing, the BoE is unlikely to take any actions at least before the election result; therefore, they are likely to keep policies steady until the Brexit negotiation deal has a clear outline.

UK inflation saw an upswing following the Brexit vote, reaching the central bank's 2% target, due to the weakening of GBP since the Brexit referendum. A weak pound is beneficial for exports and inflation, however, as wage growth has slowed down the rising inflation will likely undermine consumer expenditure; one of the major drivers of the economy.

GBP/USD has rallied approximately 3% since Theresa May's announcement of a snap general election on April 18. On Monday May 8 GBP/USD hit a 7-month high of 1.2988, trading just below the significant psychological level at 1.3000, where heavy selling pressure is expected.

The BoE's announcement will likely cause a move to GBP and GBP crosses. With a hawkish comment GBP/USD will likely breach the level at 1.3000. Conversely, with a dovish comment, we will likely see a correction downward.

The French election outcome has lifted markets' risk-on sentiment and resulted in safe heavens retreat, US and European treasury yields rise thereby pushing USD and EUR up against JPY. The dollar index hit a 2-week high of 99.55 on Tuesday.

Bank of Japan (BoJ) Governor Kuroda stated on Tuesday that 'the Japanese and global economy saw a recovery' however, the BoJ will continue its QE programme as inflation is expected to reach above the 2% target in 2018. The statement further weighed on JPY.

The Bank of Japan has been considering a gradual removal the long-standing QE. However, while the economic recovery is still fragile it is likely that it will take an extended period for the BoJ to implement it until it sees solid and stable economic and inflation growth.

On Tuesday USD/JPY hit a high of 114.32, previously reached on March 15. Spot gold hit an 8-week low of 1214.15.