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USD Stays On Trend

The GBP/USD was unable to push to new lows despite FOMC Chairwoman Yellen’s optimistic comments at the close of last week. The dollar started to rally at the start of the week with cable pushing towards the lows. But the pair found support at 1.4750 and was unable to push lower from there. After much choppy price action between 1.4750 on the downside and 1.4870 on the upside, the USD finally succumbed when the U.S. non-farm payrolls was released on Good Friday. The thin liquidity of the markets, however, was not enough to send the GBP/USD over important resistance at 1.50.

Again, despite the Yellen-induced, lower low from the previous week, the GBP/USD was unable to make new lows on the weekly chart. The markets seized on the headline jobs number missing expectations big on Friday and rallied hard at the end of the week. Due to the holiday, liquidity was exceptionally thin with many market participants gone for the long Easter weekend. So we did not see cable break resistance as many bulls may have expected. This puts me at pause. When the markets open on Tuesday, expect to see the USD weaken as traders come back from holiday and react to the U.S. jobs report. However, will this stick? Personal income and average hourly earnings still rose last month. According to ISM, manufacturing prices increased last month too. Unemployment claims also dropped significantly despite the slow down in hires. While the market starts to reprice The Fed’s interest rate hiking cycle I fear the market may be getting a little ahead of itself. There is still good reason for the FOMC to still raise rates and as early as June.

GBPUSD DAILY CHART

The daily chart now supports a bullish rally above 1.50. Momentum on the RSI is very constructive. Though still below 50, it seems that momentum bottomed out at the lows of last week. Friday’s rally moved momentum to new highs indicating that GBP/USD bulls will be in control to start the new trading week. Because the dovish fundamentals for the GBP, buyers will have a tough time moving to new highs. If price does break above 1.50, we will need to see confirming action into next week’s trading to really see that the pair is ready for a sustained bullish run.

This is an excerpt from this week’s issue of Quid Report. Subscribers receive my research on all major GBP pairs at the top of the week, including access to @faithmightfx on Twitter for daily, real-time calls and adjustments to the weekly report. AVAILABLE NOW.

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Election Times

I remember the price action during the Scottish referendum. $GBPUSD moved over 500 pips on the announcement of the its official results. So I find this chart from Financial News to be incredible:

BlackRock took a snapshot of this adjusted sterling volatility measure at the start of this week, and compared that to snapshots taken 37 days before the 2010, 2005 and 2001 UK general elections, and last year’s Scottish Independence referendum.

The result is the chart above. What it shows is that the currency markets, at least, are the most nervous they’ve ever been ahead of a UK general election.

What kind of volatility comes with a market that is the most nervous it has ever been?! It’s a terrifying thought but apparently not for investors.

…BlackRock’s analysts observe that while implied sterling volatility has spiked in the currency markets, other areas of the financial world currently appear almost complacent about the UK election. Credit default swap spreads, for example, which capture the price of insuring against the risk of a UK government debt default, have remained stable, and the gilt market “has priced in little fiscal risk premium since the 2010 election”.

It concludes: “Could markets be too complacent? We think so. We do not see the election posing long-lasting credit risk to owners of UK sovereign debt – but we do brace for volatility in the short term.”

In a world of easy money and you are one of 2 reigning money in, perhaps it is as simple as supply and demand. Money flows to high quality yield. Demand for GBP-denominated assets could buoy GBP even if markets are the most nervous they have ever been about a British general election. For long-term investors, this is noise. The trends are clear for the GBP. For day traders, this volatility will be a fool’s paradise. Either way, it is opportunity.

The only way to come out of the volatility unscathed and capitalize on the opportunity is to have a plan and trade your plan. Know what’s coming and ride the waves soundly.

Source: Markets’ pre-election nerves run high (Financial News)

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CHART OF THE WEEK: EURO HERO

Each week, I’ll highlight a chart out of the Quid Report.

This week it is the $EURGBP 4-HOUR chart. Everything about this pair screamed for more weakness at the top of the week. And it was bearish until about 8 hours ago. And this chart suddenly came into play. The reasons why are posted on the feed. I love these markets.

EURGBP 4-HOUR CHART

Subscribers receive my research on all major GBP pairs at the top of the week, including access to @faithmightfx on Twitter for daily, real-time calls and adjustments to the weekly report. SIGN UP AND RECEIVE A FREE TRADING BOOK AVAILABLE NOW.

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Pay Attention to Risk

I asked the question as the week closed on Friday.

For all the geopolitical stress on markets right now, it is no wonder that USD weakness can’t get a foothold in cable. Looming in the background are many geopolitical risks at play. War is waging, energy markets are changing, deflation won’t go away, and yields won’t go higher. Elections around the globe have created shifts in fiscal policy. We see that with Greece. Nigeria voted in a new president and a change of government over the weekend. The U.S. will do the same next year. While equities have remained at highs, perhaps markets are getting a bit more cautious and risk averse. This undoubtedly helps the U.S. dollar along with the Japanese yen and the Swiss franc – our traditional safe haven currencies.

If USD strength is to really breakout, versus the GBP in particular, price will need to break and close 2 CONSECUTIVE candles below the support zone between 1.4750-1.4800. We’ve been faked out before.

GBPUSD WEEKLY CHART

While the recent lows were a breakout below support, we got an immediate weekly close back above the support zone. With the bullish divergence here, it looks like a false breakdown may be in place. We’ll get our confirmation this week especially with the economic releases due out this week. IF price holds support, this will be a bullish signal worth taking advantage of.

This is an excerpt from this week’s issue of Quid Report. Subscribers receive my research on all major GBP pairs at the top of the week, including access to @faithmightfx on Twitter for daily, real-time calls and adjustments to the weekly report. IF INTERESTED, SIGN UP NOW AND RECEIVE A FREE TRADING BOOK. AVAILABLE NOW.

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My Appearance on FXStreet’s Live Analysis Room

I returned to the Live Analysis Room yesterday with some audacious calls for $GBPUSD, $GBPCAD, $GBPAUD, $GBPNZD and $GBPJPY. I couldn’t have timed it any better for today’s volatile trading day seemed to deliver on all those calls.

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Aussie Finally Breaks Consolidation

The GBPAUD has been in consolidation mode since making new multi-year highs at the 2.00 level, a major psychological level. The consolidation has the GBPAUD range bound as the trading week opens. Over the weekend the People’s Bank of China (PBoC) cut interest rates for the second time this year by 25 basis points. When bearish news breaks in China, it is oftentimes reflected in a weak AUD. However that trend was bucked as the Reserve Bank of Australia delivered its decision on monetary policy this Tuesday. Markets did not respond to the PBoC with the RBA announcement so imminent.

The bearish divergence on the daily chart is slight. While it is not terribly indicative of a sell-off, there has been a decline to new lows. The RBA maintains its dovish rhetoric even as they didn’t move on monetary policy this month after cutting interest rates just a month ago. This RSI divergence could help prices slide back to the bottom the range around 1.9600. A break lower looks for 1.9500, however, it would take a shift in sentiment out of the RBA for prices to break below the 1.9500 support level and 61.8% Fibonacci level.

GBPAUD WEEKLY CHART

The bearish divergence on the weekly chart is even more pronounced than on the daily chart. These bearish divergences signal a deeper sell-off is more likely before the rally resumes. If the RBA had delivered more hawkish rhetoric or the Bank of England indicates a delay in interest rate hikes on Thursday, a deeper correction takes price back to the major whole number at 1.90. This 1.9000 level also coincides with the big 61.8% Fibonacci level on the weekly chart.

Trade what you see.

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The Sterling Digest, 28 February 2015: en fuego

Sterling has staged big rallies across the board. Much of this new strength comes on the back of heightened expectations that the Bank of England (BoE) will increase interest rates even sooner than previously expected. As the market fully digests this new timeline in interest rate hikes, sterling has caught bid as traders buy in anticipation of tighter monetary policy.

While a big reason for the rally in sterling, monetary policy is not the only reason. Global deflation, due to the crash in oil prices, has caused other currencies to weaken considerably. As such, sterling has been able to rally to multi-year highs versus currencies like the Canadian dollar, the euro and the Australian dollar. Lastly, the sterling is catching bid as a safe haven currency. The discord between the the new Greek government and the rest of the European Union and continued manipulation by the Swiss National Bank in the francs markets, has traders piling into sterling as the only desirable European currency available. As long as these conditions continue to persist, expect sterling to continue to benefit on the long side in the medium term.

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The Sterling Digest, 14 February 2015: sentiment shifts

The U.S. jobs report was phenomenal. All kind of good points including a rise in the participation rate and an uptick in wage earnings. Finally! But 1 data point doesn’t make a trend. A data point that did trend this week, however, is U.S. retail sales. Retail sales in the world’s largest consumer economy missed for the second month in a row. And it missed big.

This has sent the USD to consolidate lower across the board. Even oil has managed to stage an impressive rally to close the week. Oil continues to be a major headline in the markets. It was mentioned throughout the Bank of England’s Quarterly Inflation Report. With low inflation in the UK, due to oil prices, coupled with wage growth, the BoE believes inflation to rise faster than expected. Thus, rate hike expectations have actually accelerated resulting in a renewed rally in the GBP that could drive direction in sterling pairs in the mid-term.

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The Sterling Digest, 31 January 2015: central bank drama

Davos cartoon posted on Twitter
The World Economic Forum. The time of year when central bankers like to surprise.

It’s been an incredible month. Our first trading month of 2015 is in the books and it did not lack for surprises and drama. Crashing oil prices kicked off volatile trading as the new year began. The Swiss National Bank got things going with their surprise abandonment of their currency peg to the euro and interest rate cut into negative territory. The Bank of Canada surprised markets too with its interest rate cut much sooner than markets expected. The European Central Bank also managed to surprise with a larger than expected quantitative easing package. The Federal Reserve surprised markets too but in the other direction. While it did not make any changes to monetary policy, the $FED remains hawkish following Yellen’s hawkish signals in December. Finally, the Bank of England turned seemingly dovish with its hawks relinquishing their call for interest rate hikes. The incredible drama series that was January certainly sets the stage for a new normal to emerge in 2015.

Image credit

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How Will The Fed Respond?

The $GBPUSD finally broke below psychological support at 1.5000 on the back of QE-induced euro selling. There is a bullish RSI divergence, however, at the lows. This is fueling the rally back to 1.5100 as the new trading week gets underway. However, it is likely to find resistance at the 50% Fibonacci level at 1.5109.

GBPUSD DAILY CHART

Traders, this week, have their eyes set to the Federal Reserve interest rate decision on Wednesday. It is likely that the $FED does nothing but it will be interesting to hear how Yellen performs during the press conference. Last month, she surprised the markets with her hawkish sentiment and the USD rallied as a result. A USD rally on a hawkish Yellen will manage to push the $GBPUSD to the lows at 1.4950.

However, it is a very different world now. The Swiss National Bank (SNB) has abandoned their currency peg in the $EURCHF, the Bank of Canada has cut interest rates, the Danish National Bank cut interest rates twice in a 1 week, the Central Bank of Nigeria has restricted USD buying versus the naira and the European Central Bank (ECB) has started in on a €1.1 trillion quantitative easing program. These unprecedented and surprise moves by the world’s central banks have likely been in response to the SNB or the ECB or both. So how will the $FED respond? The US central bank is not likely to enact monetary policy based on what others are doing or not doing. With Yellen hawkish but the rest of the FOMC fairly dovish along with the rest of the world, Wednesday will be a very interesting trading day and will likely dictate direction in the USD for the following trading sessions.

Given the chart, any rally in the $GBPUSD on a weakening USD seems well contained by the Fibonacci levels and the former support-turned-resistance zone. Trade what you see.

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