(Reuters) - The dollar weakened against most major currencies on Friday, weighed down by an unexpected decline in U.S. retail sales last month that once again dimmed expectations for an interest rate increase in December.
U.S. retail sales unexpectedly fell in August as Hurricane Harvey likely depressed motor vehicle purchases, dropping 0.2 percent last month. Economists polled by Reuters had forecast retail sales nudging up 0.1 percent.
Looking ahead, the market is now focused on next week’s Federal Open Market Committee meeting, in which the Fed is expected to start reducing its balance sheet. There is, however, zero expectation for an interest rate hike.
“The Fed’s tone and stance during next week’s FOMC statement and press conference will play a major role in setting expectations for interest rates, the Fed’s balance sheet reduction plans, and the U.S. dollar going forward,” said James Chen, head of research at Forex.com in Bedminster, New Jersey.
Sterling, meanwhile, slammed the dollar as well, after a Bank of England policymaker opened the door for a possible rate increase in the coming months. That helped push the pound to its highest since the results of last June’s vote to leave the European Union, putting it on track for its best week against the dollar since October 2009.
Currency traders also brushed off the latest missile fired by North Korea in a volatile day of trading on Friday.
The dollar initially dipped against the safe-haven yen after North Korea fired a missile early on Friday that flew over Japan’s northern island of Hokkaido far over into the Pacific Ocean.
However, the yen’s fall against the dollar on Friday raised questions about investors’ willingness to buy Japanese assets when Japan is in North Korea’s firing line.
In late trading, the dollar rose 0.6 percent to 110.88 yen, posting its best weekly percentage gain since November.
Britain’s pound, meanwhile surged above $1.36 on Friday.
Sterling had already recorded its best day since April on Thursday, after investors brought forward their rate hike bets following the Bank of England’s signal that it would tighten soon.
It built on those gains on Friday after BoE policymaker Gertjan Vlieghe said “the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
The euro was up 0.2 percent at $1.1940, staying below a 2-1/2-year high set last week. That pushed the dollar index to 91.868, down 0.3 percent on the day.
Chart of the Week: Volatility, What Volatility?
by Fathom Consulting
Last month we passed the tenth anniversary of the financial crisis – an event that turned conventional wisdom about how economies operate on its head, and exposed widespread risks in the financial system that had previously gone unchecked. This led to a repricing of risk across the board. While policy uncertainty across major developed countries increased since the financial crisis and subsequent euro sovereign debt crisis, and remains historically high, the same is not true of the standard deviation of stock market returns, or other volatility measures such as the VIX.
The VIX index is a measure of market-implied expectations of near-term volatility calculated using S&P 500 index option prices, and is a closely watched barometer of investor sentiment and market volatility. Not just far below its historical average, the VIX index is currently close to its lowest recorded level. Investors appear remarkably sanguine, despite stretched valuations across many asset classes and considerable political uncertainty in the US and elevated geopolitical tensions. One explanation could be the emergency level of monetary stimulus provided by central banks, or maybe investors simply think this time will be different.
COT Report
Recent CFTC data shows changes that we are expected to get and talked about it on last 2 weeks. This is just minor changes yet, but it could become just a first bell of coming retracement. Besides, on 24th of September Germany will take elections and some position closing looks logic before this moment. Anyway - last week chart shows that net long position has dropped while open interest has increased. It means that new shorts have come to market, not just long closing.
Recall that overall EUR net long position stands near all time high and market just can't proceed upside action as nobody rest who could buy and support previous trend, because mostly all traders already keep longs... Thus, position needs to be off-loaded a bit. Usually it happens thanks to short-term traders and speculators. They more actively change direction of trading.
Of course, it's a bit difficult to make conclusion just by result of single week, but this sign anyway not in favor of bulls.
Technical
Monthly
Last week long-term EUR picture has not changed significantly. The only new important detail here - wash'n'rinse of previous top. August was indecision candle and in September price has tried to move higher but failed. This is sign of weakness and it increases chances on deeper retracement on lower time frames, mostly on daily.
Appearing of strong resistance on monthly chart, right at the moment of overloaded speculative bullish positions makes us to be careful with any bullish trades. We have two side-by-side Fib levels at 1.2160-1.2170 area on monthly chart and long-term support/resistance zone, where market stands right now. Monthly OB level stands higher in September and will not be a barrier. All yearly pivots have been broken up on EUR.
As you can see August month shows mostly indecision action. May be shadows of this candle are not as big to call it "high wave" pattern, but by it's nature, it's probably the same. Appearing of "indecision" sign at this moment mostly stands in favor of retracement rather than upside breakout.
It is a bit difficult to talk on depth of possible bounce, but monthly chart tells that it will be probably painless for bullish ambitions, if retracement will not be deeper than 1.14 area. Here we draw previous consolidation as rectangle, but in reality, if you draw upper border based on tops sharply, we will get sloped line and it stands around 1.14 area. That's why re-testing of this line is allowable and overall bullish sentiment will not be harmed:
If we recall USD Index chart as we did last week, here we have bullish "Stretch" pattern, actually. Index is oversold right at 50% Fib support. This situation also mostly stands in favor of USD. Of course, monthly chart is rather big picture and we should not treat numbers as precise levels. Mostly they are some ranges around. But they work in the same manner as on lower time frames. It means that price could fluctuate around, but sooner rather than later it will respond to support and retracement will happen. Ultimately, here we could get even H&S pattern, thus, retracement could be much stronger, compares to our minimal estimations.
Weekly
On weekly chart we have difficult situation because we do not have any tools to say whether market could climb slightly higher, or all visible targets have been achieved already and it could freely start move down. All that we have is just monthly resistance levels and, here - 1.27 major extension of big retracement plus new MPR1 in the same 1.21 area.
Last week market has not formed something special, no reversal weeks either, no Overbought. Here we could only talk on possible retracement levels that could be reached. I've drawn here sloped line that we've mentioned above and it stands in an area of K-support here.
This is our ultimate level for retracement that is allowable by bullish sentiment. If EUR will break it then medium-term picture will change. But, retracement also could be smaller. Currently weekly chart doesn't provide any clear information. Based on Pivot point framework, we could suggest - as price has dropped below MPP, it could start moving to MPS1 and previous tops around 1.16-1.17 area...
The new moments that we have here.. first is our suggestion to exit around previous tops as we've said that EUR hardly will be able to continue trend. Indeed, just minor W&R has happened. It's definitely EUR feels heavy to continue upside action. Second - price stands near MACDP line. This is always an issue to keep an eye on as bullish grabber might be formed here. That's being said, nearest downside target, if retracement still will start is 1.16-1.17.
Daily
Daily EUR perfectly has completed our Friday trading plan. Support of daily OS+MPP+5/8 Fib level that market has reached - indeed has triggered significant intraday upside retracement. Thus, daily bullish Stretch was successful in general, but what's next?
Well, usually trending market as it reaches support of this quality - uses it for upside continuation. But here we see a bit different story. Bounce us has happened but not too far. May be all fundamental moments that we've talked about above start make impact on market. Recall that new shorts have been opened last week.
Second - here we have very strong bearish divergence with MACD which suggests drop below 1.1670 lows some time
Putting its all together, right now it seems that deeper downward retracement looks more probable, some kind of AB-CD action on intraday charts, probably:
Intraday
So, on 4-hour chart our Friday trading plan has been completed - EUR indeed has re-tested broken trend line around 5/8 Fib resistance. If our suggestion on deeper retracement will be correct - EUR should start action to 1.1730 area. Here we have the same small AB-CD that we've used on previous week and it's 1.618 target stands at the same area as new larger AB-CD pattern. Here is crucial moment to watch for is trend line. If price will jump up inside broken wedge - do not go short and wait. Here some other pattern could be formed - H&S pattern for example. In this case market should complete the top of right shoulder that stands significantly higher.
That's why before taking any bearish position, we need to get pattern. On hourly chart EUR perfectly has completed our 1.618 AB-CD (and larger AB=CD as well) right at 5/8 Resistance. Actually we already have large "222" Sell pattern here, but right now it will be good scenario if we also will get minor one in a reversal point, as it will be very useful for position taking. Appearing of butterfly "sell" here is not very logical as market has no uncompleted targets above current level - all targets have been met:
Why this situation is attractive? By two reasons. First is pattern - it shows clearly where to take position and where is invalidation point. Second is a risk - it stands approx. for 30 pips. If market will jump above 1.20 area and erased this "222" pattern - don't be short, sit on the hands and wait. It will mean that this reversal point has failed and market will form something else, definitely will proceed to higher levels. May be, as we've said above - it will be H&S later in the week...
Conclusion:
In very long term perspective EUR looks positive as monthly USD index could form huge H&S pattern.
In shorter-term perspective EUR has some factors that limit its upside potential - Germany election, technical resistance and overloaded speculative long positions by CFTC data It means that EUR mostly is ready for meaningful retracement down, but still there are some scenarios exist how it could happen. In research we have discussed nearest scenario that could be formed on current price level. FOMC meeting on coming week also could support USD if Fed will announce sold-off of bonds from its balance sheet. This will dry some USD liquidity out from the market and support dollar.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Professional Forex Trading analysis by Sive Morten with Forex Peace Army. Videos are recorded fresh daily to help forex traders stay profitable:
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