EUR/USD, GBP/USD: Deeper Retracement Potential as DXY Holds 90.00

Talking Points:

– The prominence of this week’s economic calendar will expected emanate from inflation prints out of a UK and US.

– US Dollar strength from final week strike longer-term bullish trends in GBP/USD and EUR/USD.

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US Stocks Post Late Session Rally to Close Last Week

Last week saw utterly a bit on a news front, though events noticed from a price action viewpoint were a whole lot some-more interesting. The equity sell-off dominated a review for many of final week, with holds shutting on a splendid note. After carrying tested a before low as late as 1:30 PM ET on Friday, bulls came in for a late-session convene that gathering prices right back-above 2600. That strength has continued into this week’s open with SP futures looking to start a eventuality above Friday’s close. The large question, of course, is either final week’s bearish expostulate continues, and a answer to that expected involves a few other variables that we’ll pronounce about below.

SP 500: Friday Reversal Off a Lows Carries into This Week’s Open

SP 500 Futures - E-Mini SP (ES)

Chart prepared by James Stanley

US Inflation is Released on Wednesday Morning

Matters in US equities and, in-turn, global equities haven’t unequivocally been a same given Non-Farm Payrolls progressing in a month. To keep matters in scope, this NFP imitation came-out during a really ungainly time, as FOMC Chair Janet Yellen had usually hosted her final rate preference during a Federal Reserve and a bank is now saying incoming Chair Jerome Powell settle into a seat. But – we don’t hear from Mr. Powell and a Fed until Mar 20-21, so there’s a vacuum, so to speak, of no Fed explanation on a approach to assistance soften risk markets.

In that Non-Farm Payrolls news was the strongest salary expansion seen in a United States given May of 2009. Average hourly gain climbed by an annualized 2.9%, and this stoked fears of stronger army of acceleration in a US economy. Those fears of faster acceleration triggered fears of faster rate hikes out of a Fed, and lessened accommodation from a world’s largest National Central Bank. And if we mix that with a expansion that’s seen in Europe, appearing to vigilance an contingent finish to European QE, and Bond investors competence have some really large issues to understanding with in a entrance months.

Correspondingly, we’ve seen rates in US Treasuries pierce adult to multi-year highs as bond investors sell-out of land for fear of removing dejected in a stronger rising rate cycle. If acceleration is coming-in above expectations and a Fed has to travel rates faster than creatively thought, this spells a discouraging unfolding for bond investors as a holds that they’re holding currently will take a principal strike in a rising rate sourroundings (bond prices and yields pierce inversely, so aloft yields = reduce value for stream bond holdings). Below, we’re looking during yields on a 10-Year Treasury Note quick coming a seven-year high during 3.04%.

10-Year Treasury Yield Fast Approaching Seven-Year High during 3.04%

TNX - US Treasury 10-Year Note Yield

Chart prepared by James Stanley

Probably a many disconcerting partial of a above draft is a new rate of change. Coming into a year, a 10-Year was agreeable 2.4%, that was approximately in a center of final year’s range. But, given a open of 2018, that produce has been in a midst of a strong-move aloft as final week sealed during 2.84%.

US Inflation as a Focal Point

The stream backdrop puts a lot of concentration on Wednesday’s US Inflation data, set to be expelled during 8:30 AM ET. The stream expectancy is for 1.9% acceleration in a month of Jan or 1.7% core, stripping out food and appetite items. This would be a tad next a Jan imitation of 2.1%, that exceeded a Fed’s aim of 2% and started to stoke bets for some-more rate hikes in a latter apportionment of a year.

If we do finish adult with an upside surprise, we can see the equity brief continue while Treasury Yields continue to rise. The fact that we have to wait for some-more than a month to hear from a Fed can usually lower a opacity around a situation, as we’re not utterly certain if a Fed competence pierce towards ‘price turn targeting’ in sequence to let acceleration run above aim before forcing additional rate hikes that competence serve ruffle bond markets.

The US Dollar could be an engaging marketplace to watch around this theme. The Dollar held a bid around that NFP news from a integrate of weeks ago and continued to trend-higher final week. DXY finally took-out a 90.00 turn and given then, has built-in to a operation with support coming-in during before resistance.

US Dollar around ‘DXY’ Two-Hour Chart: Range Builds After Bullish Break Above 90.00

US Dollar dual hour chart

Chart prepared by James Stanley

EUR/USD With Deeper Retracement Potential

EUR/USD started to uncover bearish tendencies final week, as shorter-term charts started to some-more prominently prominence lower-lows and highs. On Tuesday, we looked during support holding on by a thread in a pair, warning that a territory of support competence not reason for most longer. Prices afterwards sank down to a second and third levels of support, of that prices have been range-bound between ever since. This highlights a intensity for a deeper drawdown as that before thesis of prevalent Euro strength takes a deeper breather. It was usually 3 weeks ago that the span surged adult to uninformed multi-year highs above 1.2500, and after a week of back-and-forth, prices began to break-lower to deeper levels of support final week.

EUR/USD Two-Hour Chart: Prices Breaking Down to Deeper Support

EURUSD Two Hour Chart

Chart prepared by James Stanley

GBP/USD In-Focus Ahead of UK Inflation

Also final week, we saw the Bank of England take a hawkish twist in approval of a stronger army of acceleration that have been display in a UK economy for over a year now. After carrying a pacifist tinge around a post-Brexit backdrop, a BoE warned that faster and incomparable rate hikes competence be on a setting as acceleration stays above 3% in a UK. The evident greeting was one of strength as a British Pound shot-higher on a news, though that didn’t final for long. A drop in a US Dollar found support during before resistance, during that indicate bulls took over; and that incomparable pierce of USD strength helped to lift GBP/USD back-down next 1.4000.

GBP/USD Hourly Chart: BoE-Fueled Strength (in Blue) Short-Lived

GBPUSD Hourly Chart

Chart prepared by James Stanley

Longer-Term Support in GBP/USD

As we wrote forward of final week’s Super Thursday, the bearish momentum that had showed in a British Pound forward of a eventuality should not have been discounted. We warned that prices had plunged down to a large feeder support level, though longer-term stances competence be improved served by watchful for a deeper support strike before plotting bullish delay scenarios for longer-term trends. That territory runs from a before collection of swing-highs from 1.3589 adult to 1.3658; and this could make plan around longer-term bullish delay a bit some-more clear.

GBP/USD Daily Chart: Potential Support Zone Derived from Prior Resistance

GBPUSD Daily Chart

Chart prepared by James Stanley

To review more:

Are we looking for longer-term research on a Euro, a British Pound or a U.S. Dollar? Our DailyFX Forecasts for Q1 have a territory for any vital currency, and we also offer a engorgement of resources on a EUR/USD, GBP/USD, USD/JPY, AUD/USD and U.S. Dollar pages. Traders can also stay adult with near-term positioning around a IG Client Sentiment Indicator.

— Written by James Stanley, Strategist for DailyFX.com

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