EURUSD, GBPUSD, USDJPY
Weekly Forex Analysis
(August 24 - August 28, 2020)
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EURUSD Technical Outlook:
After breaking through all the notable medium-term resistance zones, only the long-term 12-year resistance remains an obstacle for higher EURUSD levels. The trendline is, in fact, standing close to 1.17, but because it is of such long-term nature, it wouldn’t appropriate to deem it broken until EURUSD has moved sustainably above 1.20.
Looking for clues on the near-term direction, we turn to the daily chart. Here, we can see a clear bullish channel has been established going back to May. This formation, combined with the 12-year resistance trendline indicates that the trend is likely to pause. The main question is whether it will be a sideways consolidation or a downside correction. The key to the answer lies in the 1.17 support. The 1.17 support mainly comes from the bull channels’
support line, and from the recent lows EURUSD formed here during this early stage consolidation (see chart). This forms a solid near-term confluence support, that if broken, is sure to open the door to a deeper correction, most likely to the 1.15 area.
US Dollar Fundamental Outlook: USD Staging A Rebound? Fed Chairman Powell in Focus at Jackson Hole Conference
The US dollar completed a promising rebound last week after the Fed meeting minutes showed no discussion about yield curve control (YCC) or average inflation targeting (AIT) policy took place among FOMC participants. Short dollar exposure is running at extreme levels making the bears that much more vulnerable to a correction. Last week’s USD bounce could prove as the first leg of a meaningful correction if the Fed continues to
sidestep the shift toward even more dovish policy, such as via yield curve control or changing their inflation target to an average.
The Jackson Hole conference, this year conducted via a video call, will be the pivotal event of the week that can determine the direction of the dollar. A traditional event that has been used in the past for laying the groundwork for major monetary policy shifts, many are now betting that the Fed will use the opportunity in Jackson Hole to pre-announce yield curve control and/or average inflation targeting. If
they do, the dollar will likely take a hit as an extension of the bear trend. If, on the other hand, the Fed decides to pass on the opportunity again (Powell makes no mention of providing more stimulus any time soon), then the disappointment of USD bears is likely to grow larger and spur a stronger upside USD correction.
The USD Forex calendar also features notable data releases such as the CB consumer confidence, durable goods orders, preliminary GDP (second estimate), and PCE prices. Though unlikely, large deviations in the actual data from forecasts could, of course, trigger some sizeable price reactions.
Euro Fundamental Outlook: Time for EUR Consolidation or Correction?
Not just EURUSD, bust most EUR crosses ended lower last week after bulls were disappointed by the miss in the PMI surveys on Friday. The manufacturing and services PMIs declined across the board, suggesting that the recovery momentum in Europe may be losing pace. This may and probably is related to the increase of COVID-19 infections across the old continent. Germany and other European nations are seeing the highest numbers of
daily infections since the April/May peaks.
The conflux of these factors is likely to weigh on the EUR currency in the near-term, especially in combination with extended long EUR positioning. There is also the additional risk that ECB policymakers may react to euro strength, either via dovish comments or implying an expansion of the PEPP program. On balance, although the predominant trend remains up, the odds for EUR bulls have shifted toward a consolidation or downside correction at this point.
The EUR calendar features no market-moving reports this week, hence the euro may also take cues from Jackson Hole and developments with other currencies. The direction of the dollar particularly can trigger a broad-based EUR correction if those extreme EURUSD longs start to unwind their positions.
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