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EUR/USD Back to Support as USD Stages Strength Ahead of FOMC Minutes

Price action and Macro.

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Talking Points:

- This week’s economic calendar offers a couple of key releases of meeting minutes from past rate decisions, with FOMC minutes to be released on Wednesday and ECB meeting minutes released on Thursday. Later on Thursday, FX markets get a pivotal release of Japanese inflation for the month of January.

- The US Dollar continues to hold on to Friday gains after DXY posed a bullish engulfing candlestick on Friday. This formation comes after fresh three-year lows in USD, begging the question of whether the deep oversold nature of the US Dollar may allow for a continuation of gains after what’s been a brutal past 13 months.

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US Dollar Strength Continues After Friday's Bullish Engulfing

Last week was another rough outing for the US Dollar, as the US currency sank to another fresh three-year low, even as inflation out of the US came-in above the Fed’s target of 2% for the fifth consecutive month. Normally, a print of this nature would equate to some element of strength in the representative currency as markets factor-in a higher probability of increased rates on the basis of that new, higher inflation. But – not only did that not happen last week; but that US inflation print appeared to trigger the opposite – aggressive selling in the Greenback until buyers came-in to produce a Friday rally off of the lows. That Friday rally was rather impressive, producing a bullish engulfing candlestick that has, thus far, continued to help produce gains in the early-portion of this week.

US Dollar via ‘DXY’ Four-Hour Chart: From Fresh Lows on Friday to Early-Week Rally

us dollar four hour chart

Chart prepared by James Stanley

FOMC Minutes Set to Be Released on Wednesday

The big item out of the United States this week is the release of FOMC minutes on Wednesday. While this could bring some volatility into American markets, the January Fed meeting had no major announcements or changes, so it’s not likely that we’ll see any pulse-ripping trends here. However, the minutes being released are from Chair Yellen’s final meeting atop the bank and there could, perhaps, be some items of interest for markets.

Notable from the final Yellen meeting at the FOMC is how equity markets reacted. Equities sold-off the day before the FOMC announcement, and then produced a Doji on Fed day. After hanging on the ropes on the following Thursday, Friday delivered a punch that we still haven’t fully recovered from.

S&P 500 Daily Chart: US Stocks Yet to Recover to January FOMC Levels

s&p 500 daily chart

Chart prepared by James Stanley

Japanese Inflation, ECB Minutes Highlight This Week’s Economic Calendar

Outside of the States, there are a couple of key economic releases for FX traders to work with. Thursday morning brings ECB meeting minutes from the February meeting, and later that night (Friday morning in Asia), we get Japanese inflation for the month of January.

DailyFX Economic Calendar - High-Impact Events

DailyFX Economic Calendar High-Impact Events

prepared by James Stanley

Both of these releases speak to rather important themes populating in Forex markets at the moment, as last week brought significant Yen strength even as BoJ Governor Haruhiko Kuroda was re-appointed for a second term, and the Euro continues to hold on to 2017 gains after a surprisingly strong year. Despite the differences, the question surrounding both economies (and Central Banks) is very similar, and that boils down to: When will the Central Bank be ready to walk away from QE?

Will ECB Meeting Minutes Bring Bulls to the Bid?

In Europe, we’ve seen this theme driving Euro-gains for almost a full year now. The European Central Bank has repeatedly said that they’re not yet at the point of proffering taper or stimulus plans, but that hasn’t stopped markets from buying the Euro in anticipation of as such. Last year, Mario Draghi’s dovish claims appeared to bring a diminishing marginal effect: Hampering the Euro around ECB rate decisions in April and June, only for those same dovish leanings to produce an aggressive rally in July.

Even when the ECB elected to extend stimulus in October, the currency faced a mere two weeks of weakness until bulls came back to the bid after a robust German GDP report in mid-November.

EUR/USD Daily Chart: Will Bulls Be Able to Retain Control?

eurusd daily chart

Chart prepared by James Stanley

January finally started to see some shift: Early in the month, meeting minutes from the December ECB rate decision showed that the bank had at least started to look at changing their forward guidance. This would be thought of as a first step away from stimulus as the bank begins to prepare markets for a shift in their stance. A couple weeks later, at the January ECB rate decision, EUR/USD caught a major shot-in-the-arm, re-approaching the 1.2500 psychological level, even as the ECB and Mario Draghi remained rather evasive on the topic of stimulus exit.

Thursday morning brings us the minutes from that meeting, and the big question is whether or not this will be another bullish stampede as markets try to get in-front of an eventual ECB stimulus exit. Or – on the other side of the argument, is an oversold US Dollar clawing back from a recent sell-off going to be enough to keep EUR/USD heading-lower. Price action in EUR/USD is currently testing through a short-term area of support.

EUR/USD Four-Hour Chart: Slipping Below Short-Term Support, Subordinated Support Applied

eurusd four hour chart

Chart prepared by James Stanley

Japanese Inflation to Set the Tone in the Yen

The forces of inflation are at work in the Eastern part of the world, as well, as Japan saw its first month of inflation above one-percent in December in almost three years. This was the strongest inflation seen in the economy in 33 months, and matters in the Yen haven’t really been the same since that print came-out.

Japan CPI Rises to One-Percent For First Time in 33 Months in December, 2017

Japan CPI Growth - Monthly

Chart prepared by James Stanley

And while December could potentially be written as a one-off given that it’s the only month last year that printed above .7%, the growth in core inflation is rather undeniable as last year saw a steady stream of gains, further pointing to the continued impact of stronger inflation in the Japanese economy.

Strong, Consistent Up-Trend in Core Inflation out of Japan

japan core cpi - monthly

Chart prepared by James Stanley

Making matters more interesting around the Yen as we approach this inflation print is the fact that last week brought what should’ve been a drive of Yen-weakness to the table. BoJ Govnernor, Haruhiko Kuroda, was re-appointed for a second five-year term atop the bank. Mr. Kuroda is the architect of Japanese stimulus as he and Prime Minister Shinzo Abe instituted the strategy after Mr. Abe’s election. Another term for Mr. Kuroda was largely looked at as more of the same, which is persistent and heavy stimulus until the Japanese economy moves towards that 2% inflation target.

Despite that re-appointment, the Yen spent most of last week seeing strength; and later this week we get January inflation out of Japan. This will likely be a big push point for the currency until we hear from the BoJ in the second week of March. At that point, the BoJ could brush aside these stronger rates of inflation to recommit to stimulus; but until then, we’re likely going to see some element of markets attempting to deduce when QE in Japan may come to an end.

In USD/JPY, the currency is bouncing from the support side of a multi-year symmetrical wedge.

USD/JPY Weekly - Bouncing From Symmetrical Wedge Support

usdjpy weekly chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the Euro, the British Pound or the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our EUR/USD, GBP/USD, USD/JPY, AUD/USD and U.S. Dollar pages. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

--- Written by James Stanley, Strategist for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX

DXY Index Remains in Downtrend, Watch this Level

News events, market reactions, and macro trends.

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Talking Points:

- DXY Index descending channel since mid-January remains in place, although the bullish daily key reversal on Friday can't be dismissed.

- USD/CAD may be the best place to express a bullish US Dollar bias; otherwise, too early to call turns in EUR/USD, GBP/USD, and USD/JPY.

- Retail trader sentiment suggests a mixed trading environment for the US Dollar this week.

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Volatility is back. It's time to review the Traits of Successful Traders series to stay grounded with the tenets of risk management.

The US Dollar (via the DXY Index) is working on its third consecutive day of gains, building on the bullish daily key reversal seen at the lows on Friday. While it is tempting to call a bottom in the greenback, DXY remains in its downtrend from mid-January and thus price action can be seen simply as a countertrend move - for now.

It would appear that the US Dollar is taking on a bit more of a safe haven role these days (less of a growth currency role), largely mirroring what's been happening in equity markets: the early-February rebound in the DXY coinciding with the sharp fall in US equity markets; and today, with equity futures pointing lower, the US Dollar has rallied. It's worth noting that the VIX has moved back above 21 today as well - another sign that the recent uptick in volatility is a feature, not a bug, of market conditions now.

In the near-term, with the US Treasury set to issue $258 billion of short-term debt this week, US yields have started to push higher again, giving pause to higher yielding currencies and risk-correlated assets. Earlier today, the US Treasury 2-year note yield hit its highest level since September 2008 while the 10-year yield hit its highest level since January 2014.

But as we've discussed previously over the past week, there is a growing body of evidence to suggest markets are going through a regime change now. The old adage of 'higher yields, higher equities, and a stronger dollar' no longer applies. Likewise, there is evidence of a key relationship surrounding Gold breaking down as well.

Price Chart 1: DXY Index Daily Timeframe (September 2017 to February 2018)

DXY Index Remains in Downtrend, Watch this Level

Accordingly, ignoring the recent noise, the key level traders still need to watch out for in the DXY Index before a sincere bottom can be called is thus 91.01. The DXY Index put in its 2017 bottom at 91.01 on September 8, and since breaking through said level on January 12, price hasn't looked back. The morning doji star candle cluster that formed between January 15-17 - topping out at 90.98 - proved fruitless.

In an environment where volatility has picked up, it is absolutely imperative that traders adjust their risk management perspective. If you haven't yet, it's the right time to review the Traits of Successful Traders series in order to become reacquainted with the tenets of risk management.

See the video above for a technical overview of the DXY Index, EUR/USD, GBP/USD, EUR/GBP, USD/JPY, and USD/CAD.

Read more: FX Markets Look to FOMC Minutes, UK GDP, Canadian & Japanese CPI

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Euro at Risk if PMI Data Stumbles, Confident BOE May Lift Pound

Fundamental analysis, economic and market themes

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Talking Points:

  • Euro at risk if disappointing PMI data cools ECB tightening speculation
  • Pound may rise as hawkish BOE rhetoric compounds Brexit-linked gains
  • US Dollar looks to January’s FOMC meeting minutes to extend recovery

The preliminary set of February’s Eurozone PMI surveys is also due to cross the wires. The region-wide composite gauge is expected to show that manufacturing- and service-sector growth slowed a bit, though this will come after activity expanded at the fastest pace in at least three years in January.

Data results from the regional bloc have steadily deteriorated relative to consensus forecasts in recent months, opening the door for a downside surprise. That might encourage further deterioration in ECB policy prospects. Priced-in tightening bets have weakened since mid-January, arresting a near-term Euro rally.

Later in the day, top BOE officials including Governor Mark Carney will testify before Parliament’s Treasury committee. They will be questioned on the latest quarterly Inflation Report (QIR), which marked a meaningful hawkish shift in official forward guidance.

As it stands, markets have priced in at least one rate hike this year and see strong odds of a second. If policymakers adopt a combative stance, that may dovetail with upbeat Brexit-related news flow to inspire a meaningful move higher from the British Pound.

Finally, minutes from January’s FOMC meeting enter the spotlight. The US Dollar rose while risk-geared assets (like stocks) and gold prices fell ahead of the release, underscoring the markets’ lingering concern about a steep Fed rate hike cycle. A confident stance on reflation prospects may bring more of the same.

See our free guide to learn how you canuse economic news in your trading strategy!

Asia Pacific Trading Session

Euro at Risk if PMI Data Stumbles, Confident BOE May Lift Pound

European Trading Session

Euro at Risk if PMI Data Stumbles, Confident BOE May Lift Pound

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakonTwitter

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