The Daily Edge

Pound Unloved As BoE Rate Cut Priced In

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

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Quick Take

With US equities making fresh record highs and the low vol environment persisting after the brief US-Iran shake-out scare, it is no surprise to see the Japanese Yen struggling for a fourth day in a row, while the consistent buy-side pressure on the Swissy continues to defy to a certain degree defy logic based on the current carry-trade environment promoted. Chatter that the US will no longer label China an FX manipulator as a gesture ahead of the signing ceremony of the trade deal this Wednesday has undoubtedly fueled the risk sentiment. The indisputable winner this year continues to be the US Dollar, with most of the US NFP-led losses recouped, partly due to the positive technical outlook and the seasonal anchoring it shows through January. On the other side of the spectrum we find the Pound, which sees no end to the sell-side momentum as the market now fully pricing in a rate cut by the BoE by Sept this year following dovish remarks by Bank of England MPC member Vlieghe and a gloomy Q4 GDP in the UK. The Aussie and NZ Dollar continue to recover some ground, emboldened by ‘risk on’ flows but most importantly, by the news that the US will ease its rhetoric towards China’s FX practices. The Euro, with low vol still the norm, managed to put on a decent performance with steady demand flows, while the Canadian Dollar remains in an overall bullish bias even if the last BOC business survey figures did not provide the help needed to see further buying interest on Monday.

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Chatter China no longer labeled FX manipulator: The US is about to remove the label of ‘currency manipulator’ from China, in what’s seen as a gesture ahead of the signing ceremony of the trade deal. China’s delegation landed in Washington today ahead of Wednesday’s signing. According to Fox’s Edward Lawrence, “Senior Administration Official tells me Foreign Exchange report is expected to come out before China signs Phase One trade deal. Source in #China tells me today the Chinese will be removed as a currency manipulator in the report. Chinese trade sources wanted off to sign #trade deal.” The news sparked further ‘risk on’ and lifted the Yuan, assisting the AUD and NZD.

GBP selling as market fully prices BoE rate cut: The Pound was hit by consistent selling flows in Asia and Europe after Bank of England MPC member Vlieghe said he is ready to cut interest rates if data does not improve. The policy-maker detailed that “personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other and the next few meetings are absolutely live. I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” Then came the dismal UK November GDP data, much weaker than expected at -0.3{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}, trouncing the Pound further as the market fully prices in a BOE rate cut by September this year.

Record highs in US equities: In fact, the S&P and Nasdaq printed fresh record highs. The final numbers show the S&P rising shy of 23 points or 0.70{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} to 3288.00, while the Nasdaq rose 95 points or 1.04{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} to 9273.93. The US 30 bond yield, amid the tepid outlook for inflation and still a shaky outlook for global growth, remains confined within a small range, no showing the same impetus as equities.

Fed speakers come and go with no relevant headlines: Fed’s Rosengren and Fed’s Bostic both spoke. Rosengren remains optimistic on his view that inflation will pick up towards the 2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} mark and that he is watching higher asset prices (records for Nasdaq and S&P) as well as trade and the headwinds of global growth slowdown. Bostic said that there is no justification not to “sit back and let the economy evolve”. He outlined the “weakening of consumer pattes” and “changes in business hiring and investment plans.”

BoC business outlook deteriorates, data leaked: The Bank of Canada Q4 business outlook survey came lower with future sales at +11 vs +23 prior, with a major human error as the BoC leaked the numbers earlier on its website. Looking at the details, investment intentions collapsed to +11 vs +28 prior, while employment picked up to +43 vs +31 prior. The rest of the numbers were, on balance, weaker than the previous report.

NZ business confidence keeps improving: The NZIER business opinion survey for Q4 improved to -21 vs -40 prior with a smaller proportion of businesses expecting a worsening in general economic conditions. The news follows the recovery in the ANZ’s New Zealand business confidence index, in what represents further confirmation that the NZ economy, in terms of business conditions, is improving. For a summary of the report published by NZIER, please visit the following link.

China trade, US CPI, eaing season eyed: In terms of economic indicators for today. China trade figures for December are scheduled for a tentative time release during the Asian session. The market is expecting a rise in both exports and imports in yr/yr terms. In the US, the CPI data is expected to come at 0.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}. It’s also important to monitor the start of the US eaings season with banks such as JP Morgan, CitiGroup and Wells Fargo all reporting before the opening bell. These numbers will affect the sentiment in equities, which remains sizzling hot, and in tu the behaviour in ‘risk on’ trades.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.

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The EUR index shows an upside break above the smart money tracker (enhanced MA), however, I’d qualify this rise in the currency as a low quality one. The reason being is found on the tapering of tick volume on the way up, never a good sign as it indicates the lift of prices does not carry sufficient buy-side commitment to expect a lasting effect. If we throw into the mix the fact that the 13ema applied to the OBV retains a bearish slope, this should raise your alarm bells that engaging in EUR longs when it trades in these relative highs is much riskier. The volatility in the EUR-pair, as the last window indicates, remains quite low. Besides, January’s EUR seasonal patte, as mentioned, is poor, averaging more than 0.5{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in losses since 1982.

The GBP index has expanded the downward bias and looks set to retest a key level of macro support judging by the multiple times this area saw buyers re-emerge (last time Dec 23). However, we are still not there and the risks are building up for further losses until hit. Monday’s price action carries sufficient tick volume to expect follow through supply to be retained. The market structure is bearish, anchored by the enhanced moving averages tracking the main trend by the smart money category. Besides, as reiterated on several occasions, as in the case of the Euro, the Pound faces the prospects of a negative performance during January.

The USD index displays a bullish outlook even if the price structure is not necessarily supportive. However, when taking a holistic approach to the chart, there is enough evidence to think the USD has a decent chance of keep extending gains from here on out. Firstly, the breakout of the resistance line last week on huge volume raises the prospects of buying on dips in case we see shallow pullbacks towards a retest of that area. Next, the enhanced moving average as a proxy of the smart money trend has stabilized in bullish territory. Besides, the USD, despite a poor US NFP, has recovered most of the ground after Friday’s losses. The compounded tick volume trend (13ma applied to the OBV) also stays bullish, which means greater buy-side commitment and high risk of keeping USD short exposure. The seasonals for January are extremely positive too.

The CAD index is a market that has buy on dips written all over the wall if judging by the technical picture. In fact, the last retracement seen last week was bought up at the 38.2{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} fibo retracement, indicative of the high interest to engage in buy-side business on weakness. My base case is that the area between the 38.2 and 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci retracement offers good value to see buyers flexing their muscle for an eventual squeeze higher. The index continues to have the backing of the price structure, the acceptance above the prior resistance line and the smart money flows via the enhanced moving average. Besides, the aggregated tick volume supports the trend as it communicates buy-side commitment prevails, with the low volatile trend also providing the ideal conditions. The seasonals for the CAD are positive (+0.33{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814}) in January.

The JPY index has landed at a level of support with volume tapering for the last 4 days. This is not a good omen if you keep short exposure in the JPY, even if the preponderance of technical evidence is as bearish as it gets from a price structure perspective or sentiment (record high in the S&P), which means it won’t be easy to tu the bearish tide. I am just trying to emphasize that this type of acceleration seen in the daily into a support level is a low quality leg, mostly dominated by intraday trend trading/momentum accounts vs real money. That said, as mentioned yesterday, the overall bias is outright bearish and on balance, that’s the direction most likely to keep playing out until there is a shift in market dynamics. Remember, the seasonal patte for the Yen averages +0.25{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since Jan ‘82.

The AUD index could have reached a temporary top if we only focus on assessing the technical picture. The price did run away far enough from its macr support to make me think buyers, for the time being, may remove the foot off the gas pedal. The setback or temporary pause I am expecting is predicated on the basis that the midpoint of its macro range has been met. This midpoint caused the market to react and reverse in the majority of past interactions. The time to engage in AUD longs off a relatively cheap valuation was last week when the level of macro support was tested, knowing that it had proven a very reliable location to shift flows. The forex seasonal patte is positive to the tune of +0.54{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since the early 1980s.

The NZD index, on balance, keeps its bullish outlook as it finds a base at a key level of static support with the overall volume pressure as assessed by the 13ma off the OBV tuing upwards once again. The price structure also anchors the long bias, even if the enhanced moving averages tracking the smart money flows has flattened out. The volatility to be trading NZD pairs remains above the usual monthly average, so still a good market to trade.

The CHF index displays the most bullish trend out of the G8 FX space. Taking a contrarian short position just because the currency carries a negative swap when shorting it is not enough of a justification. There is no technical backing to be bearish this market at this point. The price structure is bullish, the smart money moving average anchors this bias, as does the overall tick volume pressure. The forex seasonals for CHF is for the currency to average losses worth 0.53{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} in Jan since 1982, even if this month looks like an outlier.

Important Footnotes

  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • 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.
  • 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} 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{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection


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