US Dollar, EUR/USD, GBP/USD: Q3 Ushers in Divergent CB Themes vs USD

Talking Points:

– Today outlines a finish of Q2, and a reversals that have shown in a US Dollar, EUR/USD and GBP/USD have been notable, generally deliberation a before year-plus trends that were formerly display in any market. As we pierce into a second-half of this year, a awaiting of continued sensitivity stays as markets contend with a multiple of a persistently-hawkish Federal Reserve, a dovish European Central Bank and a Bank of England with utterly a few questions surrounding a Aug and Nov rate decisions set for after this year.

– In Q2, a vital rate decisions of concentration are a Fed’s Sep assembly in that markets are now holding a 72.3% luck of a 25 basement indicate hike. The ECB’s Sep rate preference will expected be important, as well, as this is where a bank will announce sum on execution of stimulus-taper. The Aug Bank of England rate preference is a ‘Super Thursday’ event, and if we don’t get a travel there, a concentration will afterwards pierce to November. But – acceleration will sojourn pivotal around a BoE, so if we see continued decrease in that information point, contingency for rate hikes will expected slim, and this could supplement even some-more vigour to a Pound.

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Prominent FX Themes Pull Back Ahead of Q2 End

It’s been a giving behind form of morning so distant as we’ve seen some of the some-more distinguished FX themes from Q2 lift back as we proceed a finish of a quarter. In a US Dollar, prices have altered back-below a 95.00 spin on DXY, and this has helped EUR/USD organisation after another unsuccessful try during holding out a 1.1500 psychological level. But – this does not indispensably imply a finish of these themes, as quarter-end can mostly pierce counter-trend flows as traders and account managers block adult positions forward of a Q3 open.

In yesterday’s webinar, we looked during that themes competence sojourn as applicable as we pierce into a second half of this year. Below, we’re going to demeanour into a few of a some-more engaging scenarios that will expected sojourn on a front-burner for FX traders in a entrance weeks and months. Of sold seductiveness is a fact that we have dual potentially anomalous themes around a Bank of England and a British Pound and a European Central Bank and a Euro. This could emanate an engaging backdrop for USD-strength in EUR/USD, while a probability of annulment setups in GBP/USD gets a bit some-more appealing as we pierce towards a Aug BoE rate decision.

US Dollar Strength: Was Q2 an Aberration or a Start of a Fresh Bullish Trend?

Probably a biggest FX take-away from Q2 was the re-emergence of US Dollar strength. After a Presidential choosing in 2016, a Dollar remained unequivocally clever as we traded into 2017, and this took place alongside a convene in US equities. That US Dollar strength started to spin early final year while bonds continued to take-off, and this left many undetermined as to because a Dollar was so diseased when a Federal Reserve was one of a few vital Central Banks indeed looking during aloft rates.

With a bit of hindsight, we can now see that this was a change towards Europe in expectation of aloft rates there, awaiting that a ECB would have to play catch-up with rate normalization as a tellurian liberation serve took hold. This helped to minister to that clever topside run in a singular banking and, deductively, this took strength divided from a US Dollar as a Greenback forsaken by as many as 15% final year. This dump erased 61.8% of a before 2014-2017 vital move, and that support began to uncover in mid-February.

US Dollar Weekly Chart: Q2 Sees Strength Return After 61.8% Retracement of 2014-2017 Major Move

Please supplement a outline for a image.

Chart prepared by James Stanley

What altered in Q2 was a ECB. They announced how they’re formulation on exiting from stimulus, though they also negated a awaiting of near-term rate hikes, stability in a dovish and pacifist position even as they demeanour to finish their large QE program. This thesis could assistance to keep a bid behind a US Dollar as rates markets serve concentration on a 5 hikes that a Fed has designed out to a finish of subsequent year while a ECB competence be looking during one travel in that span.

US Dollar around ‘DXY’ Daily Chart: Bullish Potential As We Move into 2H, 2018

us dollar usd daily chart

Chart prepared by James Stanley

EUR/USD Reversal of Bullish Trend: Prospects of a Deeper Drop

The Euro was impossibly clever final year deliberation a position during a ECB. There were even hopes for a stimulus-exit proclamation in Oct of 2017 as markets were gearing adult to hear how a bank competence demeanour to finish their QE program. But when those hopes were dashed a discerning spate of debility showed in a Euro that lasted for about dual weeks. This was shortly equivalent by a impassioned German GDP report, and in short-order bulls were behind during work, behest a singular currency-higher. That thesis of Euro strength lasted a few weeks into Q2; though as mercantile information continued to sour, a doorway was open for a ECB to go even some-more dovish, and when this showed-up in Apr a Euro started to retreat that before bullish trend.

In a month of May we saw European domestic risk re-enter a equation, and this took over as a widespread thesis in a banking as sellers remained in-control for many of a month. This is when rumors started to boyant that a ECB would announce impulse exit during their subsequent rate preference in June, and that helped to pierce a pullback to that sell-off as markets geared adult for a same thing that had kept a banking bid around final year.

But when a proclamation came, it was joined with a warning that a ECB was looking at gripping rates during stream levels ‘at slightest by a summer of 2019,’ and this alludes to a fact that we competence be saying 5 some-more rate hikes out of a Fed during a duration in that a ECB competence be looking during one. Rate-hike bets for a pierce out of a ECB in Jun of final year were fast priced-out of a market, and Euro debility has been a sincerely manifest thesis ever since.

EUR/USD Four-Hour Chart: Rally in Early-June Quickly Reversed At Jun ECB Rate Decision

eurusd 4 hour draft eur/usd

Chart prepared by James Stanley

As we pierce into Q3, a large doubt is either EUR/USD can take-out 1.1500. We’ve already seen 3 unsuccessful attempts, many recently yesterday morning after bears got bashful when we were coming that before swing-low. Key for this thesis will be European inflation, that has been surprisingly clever over a past dual months, along with a ECB rate preference in September. If we are means to see a break-below 1.1500, a area around 1.1200 becomes appealing for a subsequent stop of support, as this is a feeder territory that helped to conclude insurgency forward of final year’s bullish incline.

EUR/USD Weekly Chart: Holding Trend-Line Support as Q2 Winds Down

eurusd eur/usd weekly chart

Chart prepared by James Stanley

GBP/USD with Reversal Prospects After a Brutal Q2

It was a rought second entertain for a British Pound.

We came into a entertain flying-high on a hopes of removing a rate travel out of a BoE during a bank’s ‘Super Thursday’ rate preference in May. But only a integrate of weeks into a second entertain and a contingency for that pierce started to drastically diminish, let by a decrease in mercantile data. Inflation slowed, GDP printed in a rather unsatisfactory manner, and identical to what was seen during a ECB in April, a doorway was non-stop for a Central Bank to take a step in a dovish direction.

This led to a dump by as many as 1,300 pips in Cable over a past integrate of months, an outsized pierce by many standards, and as we pierce into Q3, we’re again looking during a intensity for a near-term rate travel during a BoE.

What altered is a BoE itself, as acceleration stays well-below a 3% prints that we saw final year. But during a final rate decision, we saw 3 dissenting votes expel for an evident rate hike, and this enclosed a bank’s Chief Economist, Andy Haldane. This has helped to build contingency for a intensity rate travel in August, and this could potentially assistance to pull some strength into a currency.

The large doubt in Cable is what happens during 1.3000. This is a pivotal psychological spin in a pair, and this could be an engaging indicate with that to bottom annulment setups, quite if we do see a grander change during a Bank of England in Q3. We competence not even need a rate travel in Aug to do it, as that assembly could be used to lay a grounds for a Nov move; and even those prospects competence be adequate to assistance to retreat a waves of debility that’s recently shown in GBP.

GBP/USD Daily Chart: Approaching 1.3000 Psychological Support After Brutal Q2 Reversal

GBPUSD gbp/usd daily chart

Chart prepared by James Stanley

To review more:

Are we looking for longer-term research on 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 USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay adult with near-term positioning around a IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a engorgement of tools, indicators and resources to assistance traders. For those looking for trade ideas, a IG Client Sentiment shows a positioning of sell traders with tangible live trades and positions. Our trading guides pierce a DailyFX Quarterly Forecasts and a Top Trading Opportunities; and a real-time news feed has intra-day interactions from a DailyFX team. And if you’re looking for real-time analysis, a DailyFX Webinars offer countless sessions any week in that we can see how and because we’re looking during what we’re looking at.

If you’re looking for educational information, a New to FX guide is there to assistance new(er) traders while a Traits of Successful Traders research is built to assistance whet a ability set by focusing on risk and trade management.

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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