Forex Today - It's hard to be a US dollar bull if the data doesn't support

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

QUICK SUMMARY

Jerome Powell and the Fed's Beige Book both exercises their caution over the impact of thetrade war on the US economy combined with the a big miss in building permits (-2.2%) and housing starts (-12.3%) in June helped knock the US dollar back from it’s highs in what has been an otherwise mildly positive day of strength for the Greenback.

Oh, but it could have been so much stronger.

GBPUSD fell to 1.3009 on lower than expected inflation data (Core CPI 1.9% v 2.2% exp) but its back at 1.3069 for a loss of just 0.34%. Rumours this morning the EU is mulling an Article 50 extension for the UK could help it further.

Euro was down at ~1.1601 at one point last night but it’s back at 1.1638 now for a loss of just 0.2%. USDJPY is unchanged at 112.85 after peaking at 113.13 overnight when the USD was at its best.

The commodity bloc is doing better however with bounce in copper (+0.5% to $2.75 a pound) and oil (+1% for both WTI and Brent) among other commodities, plus the continued rally in metals and mining shares fuelling a little strength. The AUDUSD, which fell to around 0.7342 has bounced half a cent to sit at 0.7399, up 0.18% since 7am yesterday. It’s  as if the Chinese Yuan isn’t still falling and the headwinds have abated. Granted, the USDCNH and CNY are off their highs – but this AUD rally is more than just a USD move folks. Likewise the Kiwi bounced from its lows and is at 0.6795, up 0.2% while the CAD has gained the same percentage with USDCAD at 1.3164.

BIGGER PICTURE

It would be disingenuous of me to talk about relative growth and policy as a key driver of forex rates and not highlight that last night’s data in the US saw a big fall in the CESI to -1.1.  It’s only just in negative territory but the key here is that the relative outperformance of the US economic data flow – not the economy – has been materially reduced in the past month. That is something I’ve highlighted recently. But a negative print for the CESI will garner much attention.

A good example of what that might mean to forward pricing of interest rate expectations and thus Forex pairs can be seen in the tweet from my old colleague Richard Franulovich from Westpac New York. Accompanying the chart below Richard wrote, “#MACRO #ECONOMY US growth leadership under threat? Housing starts (white) tumbled 12.2% in June, 6m ahead CAPEX plans in the Fed Empire survey (orange) take a dive”. 

Source: Twitter Screenshot
Source: Twitter Screenshot

 

While I remain bullish on the US economy and hold a more jaundiced view of the EU and elsewhere the relative economic prints remain something to watch closely.

Today's chart is a different way of looking at the EURUSD exchange rate. 

What I've got here is the weekly Euro chart using a double Bollinger band strategy. What's good about this approach is that it lets you get into a move if you miss the initial pulse. In this case, the Euro fell right out of bed with hardly any decent opportunity to get in until the bottom at 1.15 and bounce over the next two weeks which ultimately saw it hit around the 1.1850 regioni.

That was on the first standard deviation BB but below the 13 eriod EMA. Again last week EURUSD bounced back to the 13 period EMA but failed. My read on this is that the past 8 weeks trading shows the Euo consolidation pattern is still within the overall downtrend.

But if Euro takes out the 13 period EMA at 1.1785 and last week's high at 1.1790 (give it a few points and call it 1.18+) then a bigger reversal is afoot. A break of 1.1590 would suggest the next leg has begun lower. 

Click on me, I'll expand
Click on me, I'll expand

Which ever way the Euro breaks - and the balance of probabilities despite the consolidation are lower as long as it's below 1.1800 - will be important for the other big currency pairs. Data is going to be important. 

DATA:

On the day today the big release is Australian employment for June. The Reuters poll says the market is looking for an increase of 17,000 jobs and an unemployment rate of 5.4%. Australian data has improved a little recently. This is very important for the Aussie dollar and interest rate markets still grappling with exactly where households and consumers are at.

Retail sales in the UK will be important for forex traders and other than that it’s just jobless claims and the Philly Fed manufacturing index in the US.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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