EURUSD, GBPUSD, USDJPY
Weekly Forex Analysis
(September 14 - September 18, 2020)
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US Dollar Fundamental Outlook: Is the USD Bound to Rebound?
The dollar index (DXY) recorded another green weekly candle, the first back-to-back positive weeks in 3 months. It is tempting to view this development as evidence bottom, especially given the several strong rejections each time the bears attempted to break lower. While estimating the long-term dollar trend is a different feat, the Fed meeting this Wednesday could indeed prove a catalyst for a near-term USD
correction.
Expectations are for the economy’s recovery to continue, possibly even at a faster pace than initially expected. Thus, no big decisions on monetary policy are seen at this Fed meeting. FOMC participants will also release their updated economic projection and the dot plot on Wednesday, which could turn out to be a key element to spur volatility in markets. Given the already priced in dovish expectations and extended short positioning, the dollar can rebound if
the Fed leans even slightly to the hawkish side. For example, markets may read the event as hawkish if Fed officials are more optimistic in their economic projections, or if Powell provides no details regarding the new average inflation targeting policy.
The USD impact is likely to be more muted, on the other hand, if Chairman Powell focuses on the risks to the economic outlook instead of on the positives. Or he may choose to maintain an overly dovish stance, e.g., via statements such as “we are not even thinking about thinking raising rates.
Retail sales data will also be released on Wednesday, where strong numbers could offer additional support for the USD.
Euro Fundamental Outlook: Hawkish Lagarde Fails to Drive EUR Higher
The ECB surprised everyone last Thursday by expressing confidence that their policy response will support the economic recovery and made no reference to increasing the quantitative easing (PEPP) program or changing interest rates. President Lagarde wasn’t worried about the appreciating euro either, which sounded an overall hawkish tone at the press conference.
However, the euro didn’t extend the initial gains and now trades at levels where it traded before the ECB meeting. The euro’s failure to rise on a hawkish ECB is a sign that the market may be ready for a correction lower. This would probably be most evident in EURUSD as the long exposure is the most extreme there.
Two clear instances support this narrative:
- EURUSD failed to sustain higher levels after Powell’s announcement for average inflation targeting policy (August 27)
- EURUSD failed to extend the uptrend after ECB”s Lagarde gave the green light to further gains last week
After all, if it doesn’t go up on good news, what do you think it will do on bad news?
Such developments are usually indicative of exhaustion of the uptrend and mean that once there is some positive USD or negative EUR news, EURUSD will be quick to break lower. On balance, sentiment on EURUSD seems to have shifted clearly neutral at least, and ready to turn bearish under the right circumstances.
The EUR calendar for the week ahead is light with no major market-moving data scheduled.
EURUSD Technical Outlook:
Failure to hold below 1.18 and then above 1.19 last week meant that EURUSD remains inside the 1.18-1.1950/1.20 range. The technical levels are not as clear as before, though. With the multiple breakouts and failures, it is better to view this as a loosely defined range rather than some distinct formation with precise levels.
Key support still lies at the 1.18 area, however, a decisive break of which should still open up the potential for bigger correction to the downside. The support may extend down toward the 1.1750 lows, though 1.18 should be the pivotal support zone. To the upside, 1.19 and 1.1950 should provide resistance, with 1.20 likely to prove as the line in the sand again.
1.22 to the upside and 1.15 to the downside remain the important technical zones outside of the current range.
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