EUR/USD, USD/JPY and GBP/USD Price Action Setups
- This is a holiday-shortened week in the United States; but there are some very big questions for the U.S. Dollar as the currency trades in the vicinity of fresh 13-year highs.
- This recent USD-move has produced reverberations and what could be the initiation of multiple new themes, such as the potential for prolonged weakness in the Yen.
The U.S. Dollar rampage that has taken over markets since the U.S. Presidential election is finally seeing a bit of pullback as we open the week; and this is a holiday-shortened week in which U.S. markets will be closed on Thursday in observance of Thanksgiving, with Friday being a half-day for many U.S. markets.
Last week the U.S. Dollar posed a breakout to stage fresh 13-year highs. And while we did see a bit of resistance on Wednesday, this came in as more of a speed-bump than a brick wall, and Thursday and Friday saw the currency drive even-higher.
This strength in the greenback has shown up fairly well against the Euro as EUR/USD is lurching down towards annual-lows; but on Friday, price action ran into a long-term trend-line projection that makes up the under-side of a bear-flag formation; and since has been supported. Further complication matters of continuation is the fact that we have three potentially-key levels of support within 200-pips below current price action (two prior price action lows, and the 1.0500 psychological level).
Dollar-Yen has probably been one of the more shocking moves in the post-Election environment, as the Yen continues to weaken against many major currencies. This is likely resultant of a few different drives, key of which is the recent modification that the Bank of Japan made to their stimulus program in September that will, in essence, allow them to buy as many bonds (or as few) as they might want in their goal of ‘yield curve control.’ Given that we have a re-emergence of the risk-trade in the post-Election environment, we’re seeing markets price-in even more Yen-weakness down-the road.
USD/JPY set a new five-month high this morning, approximately 1,000 pips above the lows of election night. Just a little bit above current price action, we have a Fibonacci level at 111.618 that could pose as resistance. This is the 50% retracement of the 18-year move in the pair (taking the high from 1998 to the low of 2012), and this zone had given multiple iterations of support and then resistance in February-April of this year.
One issue that has noticeably stuck-out is the fact that, while the U.S. Dollar is running rampantly to new-highs, producing new lows in many pairs such as EUR/USD or AUD/USD; GBP/USD has been relatively well-supported.
This could be from a variety of factors; perhaps the pair was just so oversold coming into elections that even a historical-move in the Greenback would be unable to produce new lows. But perhaps more interesting is the potential for a longer-term shift in the currency given the moves of the Bank of England in the post-Brexit environment.
Right after Brexit, Mark Carney and the Bank of England rushed-in a series of measures in order to proactively offset the risks from Brexit. This meant lower rates, a massive bond buying program, and a heavy implication of Central Bank dovishness. For months, there was little reason to want to buy the Sterling, as not only did we have the brutal unknown of Brexit, but we knew that the BoE was going to try to be as dovish as they could be in the effort of stimulating the British economy through any potential slowdowns that might be seen.
But there’s another side to currency weaknes, and for import-heavy economies this is a particular vulnerability; and that’s in regards to inflation on imported products. When a currency like GBP weakens by 15% or more in a short-period of time, any exporter that sells products in the U.K. notices the move. Because if the exporter selling products in the U.K. doesn’t adjust their prices, the 15% hit in the currency means that producer is taking a 15% hit on every product sold. As you can imagine, few producers want to do this – so we’ll usually see prices increase as producers attempt to offset the weaker value of the currency in order to protect their margins.
This is why Apple just yanked up the cost of all of their products in the U.K., and this likely isn’t the end of this theme. As that inflation continues to come-in and post-higher, the Bank of England is going to, eventually, have less flexibility and before-long, they may need to look at hiking rates simply to settle the inflationary forces brought-upon by the Bank of England’s uber-dovishness. And this is with an already-beleaguered economy still wading through the prospect of Brexit.
So, this is likely at least somewhat of a factor for why those fresh 13-year highs in the Greenback aren’t showing up at the present on the chart of GBP/USD. This also means that, should the U.S. Dollar trend face retracement, long GBP/USD could be an attractive area to be.
Or, perhaps, traders could look to combine two of the above themes in a setup such as GBP/JPY, such as we looked at on Friday of last week.