The Daily Edge

Fed Powell Presser Invigorates the USD

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.

Quick Take

As the market adopts a ‘true risk-off’ mood on the back of Fed’s Powell less dovish remarks on inflation, the USD reigns in the forex firmament while commodity-linked currencies see the greatest supply imbalances, especially the Aussie and the Kiwi, both recently hit by negative fundamentals (low CPI in Aus last week & bad NZ jobs on Wed). The Canadian Dollar is holding up firmer as BOC Goveor Poloz dials down his dovishness by making the case for a stronger economic recovery from Q2, in which case, considerations for another round of tightening may be justified. Too early to tell but expectations towards Canadian rate cuts have taken a step back. The Japanese Yen, emboldened by the deleveraging flows in equities and global yields, has benefited once again, while the Sterling, driven by tentative progress in the talks between the UK Labour and May’s govement on Brexit, continues to follow the Yen in locksteps. Lastly, weakness in the Euro has made its way back as a function of USD strength mainly.

Narratives In Financial Markets

  • The USD dominates buyside flows on the aftermath of the FOMC, driven by comments on inflation by Fed’s Powell at the press conference. The strength in the USD came in response to Powell’s view that recent low inflation is ‘transitory’, which spurred the buying of the world’s reserve currency and US bond yields, hurting equities.
  • Chairman Powell did not buy into the notion that the slowdown in core inflation as revealed in last Friday’s US Q1 GDP will last, citing the Dallas Fed Trimmed Mean Measure as the preferred indicator to conclude that inflation remains stable circa 1.9%. Powell downplayed the core-PCE inflation read of 1.6% we leaed last Friday.
  • In the money market, following the less dovish comments by Fed’s Powell, the pricing for a rate cut by year end was slashed from a 1 fully priced in cut to 82% chance now.
  • As part of the policy statement right before the public appearance by Jerome Powell, there was little new information to chew on other than a merely technical 5bp adjustment of the interest on excess reserves (IOER) while slightly upgrading its description of labor tightness, which is no longer a rhetoric that is going to move the market. Patience was still warranted, and in words of Powell, “there is no strong case to move in either direction”.
  • The US ISM Manufacturing PMI fell way below expectation at 52.8 vs 55 exp, the lowest level since October 2016, and a clear signal that the calls for a slowdown in growth heading into Q2 are very much justified based on early tentative evidence. Still, the US is comparatively running an economy on 3rd gear vs the RoW, which is barely getting out of 1st gear. Any calls for a Fed rate cut are way too premature, especially with consumer spending looking solid and yesterday’s ADP non-farm employment data running at its highest in years.
  • BOC Goveor Poloz made yet another appearance before a standing committee, allowing the CAD to recover back some of its mojo, reiterating the less dovish message from just 24h ago, this time stating that rate could rise if headwinds affecting the economy dissipate. Assuming that the BOC anticipation of a recovery in growth materializes, the market appears to be setting the stage for a more balanced and neutral approach towards the BOC policy setting. Money markets are still pricing about a 50% chance of a rate cut in 2019.
  • According to a report by CNBC, the US-China trade deal could be done and dusted by next Friday, which if the case, would make true the heads up by US Treasury Secretary Mnuchin, who said this week it shouldn’t take longer than 2 weeks before an agreement is finalized.
  • As European markets come back to life after yesterday’s public holiday, the calendar looks quite busy, especially on the manufacturing data front out of multiple European countries. The BOE inflation report is also due later on, but with Brexit having taken the Central Bank hostage, there is very little maneuver for Goveor Caey until a resolution of the impasse. In the US, only low-tier data is set to be released, including unemployment claims and factory orders.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

RORO (Risk On, Risk Off Conditions)

On the heels of the FOMC outcome, where a less dovish Fed was the final verdict, the market has permuted into a ‘true risk off’ profile as evidenced by the sharp selloff in the S&P 500, which comes with the added caveat of breaking the bullish structure of higher highs and higher lows on the hourly. Besides, the US 30y bond yield keeps exploring lower levels, also finding a new leg down. The dreaded alignment of the micro and macro moving averages towards the bearish side in both US equities as well as in the US bond yields space, coupled with bearish structures off the hourly, portends an ugly technical picture for risk going forward.

Is this, yet again, another miscalculated move by Fed Chair Jerome Powell at a time when stocks were bought up in eaest amid the anticipation of little to no inflation, hence increasing the attractiveness towards equities’ free cash flows? Judging by price action, the suggestion that the miss in the Fed’s inflation target is just transitionary is an admission that the Central Bank is setting higher expectations towards a pick up in price pressures, which tends to be a hawkish message to the market.

As a result, we see the DXY bid after a very sizeable daily outside bar which has allowed the micro slope (25HMA) to tu positive, which more often than not, when combined with such aggressive buyside action, tends to lead to a change in behaviour, so I am expecting the USD to stay firmer ahead of Friday’s US NFP report. The preponderance of evidence to determine the clear state of ‘risk off flows’ is found everywhere, with the Japanese Yen index retesting the highest level for the week, previously achieved on the miss of the Chinese PMIs last Tuesday, a shocker that led to a brief upset in risk too. A pair that should be in everyone’s radar as an indicator of the USD prospects in the USD/CNH, currently retesting a key support, which has so far done its job to prevent the micro slope to tu bullish. The ugly risk dynamics were also clearly manifested through the spike in the VIX towards 15.00. USD, JPY vs Commodity-linked currencies (esp AUD, NZD) looks an interesting short bias intraday.

Latest Key Technical Developments In FX Majors

Interested about downloading today’s key levels in the major pairs? Find the MT4 templates, updated daily, by clicking the link.

EUR/USD: Bearish Outside Day Shifts Bias

The sharp selloff in the exchange rate, driven by USD buyside flows, has made it to the 100% proj target, which as the daily reader of my notes can tell, it’s a very common occurrence. While marginally trespassed, the target at 1.1194 has found sufficient absorption to allow for a tepid recovery. The bias has clearly shifted to the downside based on the break of the price structure, confirmed after 1.1197 was taken out and the hourly achieved a brief acceptance below the level. In the next 24h, with only low-tier events out of Europe and the US, I suspect the market bias to take its cue from the most recent technical cues, which has clearly tued negative as the micro slope (25HMA) also indicates. The way to play this market, bearing in mind that ‘true risk off’ dynamics are present, is with the idea that the risk appears to be more skewed towards the downside during Thursday.

GBP/USD: Not The Pair To Exploit USD Strength

I wouldn’t rush to tu the bias short on this exchange rate, as one would essentially be trading the two strongest currencies in the forex firmament, which is not the best way to spot clear demand/supply imbalances. The concentration of volume via April 30-May 1 POC has led to a temporary change of behaviour by the way of a mild recovery, now faced with an immediate area of horizontal resistance at the 1.3055-60 level. Should the USD rally extend, I am looking at 1.3020 as the next projected target based on a 100% measured move, confluent with a horizontal support. Alteatively, a break above 1.3060 allows a minor void area to be exploited until 1.3075 ahead of 1.3095-1.31, where I expect offers, if filled, to pose a real challenge as it aligns with today’s ADR limit.

USD/JPY: Bullish Structure But Risk Off Caps Upside

Today’s price action in the pair is going to be a function of how intermarket flows play out. We are in a true risk-off environment amid rising interest to bid the USD, which means the pair should stay directionless and struggle to develop a concise bias in either direction. Technically, the USD has achieved a successful leg up to revert the structure on the hourly from bearish to bullish. Any retest of 111.25-30 is expected to be met with strong buying interest as part of a right-hand shoulder. The lack of direction in the pair comes as Japan continues on holidays until next Tuesday.

AUD/USD: Range Breakout Allows 0.70c Retest

The resolution of the range incentivizes the market to keep adding short positions, setting the sight on the next obvious target at the 0.70, which coincides with the 100% proj target. The first area where the Aussie should struggle can be found at 0.7020 ahead of a retest of the broken range at 0.7030. This is a market that has written all over the wall a selling on strength bias, as both technicals and recent fundamentals argue for a lower value. Besides, the intermarket tide has tued negative, with the DXY on the rise and the Chinese Yuan also printing lower levels vs the USD, not to mention that the true risk off won’t do any favor to those looking to play AUD longs.

NZD/USD: Poised To Stay Pressured

This is an exchange rate where the most recent developments, both technicals and fundamentals, suggest that the risks keep building up for a follow through bearish continuation. Wednesday’s poor NZ jobs report has heightened the possibility that the RBNZ may cut rates, while Fed Powell’s presser has shifted the expectations towards a less dovish Central Bank. The printing of a new lower low in the hourly firms up the notion that the exchange rate should continue to find enough selling interest on bounces. If the scenario pans out, the round number at 0.66 would be the next target ahead of 0.6588, which as usual, would be the 100% proj target after the 0.6627 breakout point.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection