Chart of the Day: Pound Sterling is Another Market Eying 200-Day Average

  • GBP/USD boosted by dollar weakness, risk-on 
  • Several test long-term 200-day averages after impressive recovery
  • Potential for reversal, but bears must see bearish signal first

A number of financial markets are either near, at, or just above their long-term 200-day moving averages. The likes of , , , and all come to mind. But I have just noticed that the is also very close to its own 200 moving average (MA) at just below the 1.22 handle, after rising a huge 1800 pips—or +17.5%—from the record low of 1.0343 hit just over two months ago. Everything has been driven higher because of the peak inflation narrative and thus expectations of a sooner-than-expected pause in rate increases.

GBP/USD Daily

Have risk assets risen too high, too fast?

The sheer size of the recovery across assets crosses (excluding China and crypto) means the markets may have gotten too far ahead of themselves. For after all, the Fed is still tightening its policy and big macro risks remain elevated due to the still-very high inflation across the world, and not to mention anemic growth. In the week ahead, Fed Chair Jerome Powell will be speaking on Wednesday, and we will also have lots of data to look forward to as well. If Powell reiterates the Fed’s commitment to bringing inflation down through further and highlights that one or two inflation reports are not enough to suggest the Fed’s job is done, then this could trigger a dollar recovery. 

What has driven the GBP/USD higher?

The GBP/USD’s recovery above the 1.20 handle has been supported in large part because of the US dollar falling across the board, owing to expectations that peak inflation has been reached and that the Fed will slow down and eventually pause its rate hikes. 

But looking at a number of pound crosses, the UK currency has shown some relative strength of its own too in recent times. Investors probably feel that Prime Minister Rishi Sunak appears more resolute than his predecessor in trying to address rising borrowing costs, with the PM also seen determined to soften the blow the ailing economy is facing from multiple fronts.    

Why is the 200-day so significant anyway?

Well, it is a measure of the long-term trend. More often than not, price tends to gravitate towards it after periods of excessive, on-directional, moves. 

In the case of the GBP/USD, the slope of the 200-day is negative, meaning that despite the big recovery, the long-term trend remains objectively bearish. As such, there is always the danger that the longer-term bearish trend could resume at any moment. 

So, be on the lookout for any signs of a bearish reversal on the short-term charts as we get closer and closer to it, and resistance around the 1.2200 area. 

It should be pointed out, though, that just because we are talking about the 200-day, it doesn’t mean the trend will reverse. We must see a bearish reversal signal first, before putting our bearish caps back on. 

Disclaimer: The author currently does not own any of the instruments mentioned in this article.

USD/JPY Breaks Key Support Ahead of Nonfarm Payrolls

looks heavy on the daily, where we’ve broken below rising trend support (drawn from the May swing) and out of the I-cloud, which price was hugging from mid-Nov.

We can see a marked increase in the 3-day ROC, and a close through the Nov. 11 lows of 138.46 could see the pair start a bear trend, with the 200-day MA at 133.84 potentially coming into play.

USD/JPY price chart.

USD/JPY price chart.

Clients are perfectly split here on short-term direction, with an exact 50/50 split in terms of USD/JPY open positions – however, should we see a closing break of 138.46, we’d likely see momentum accounts look to increase short exposures, as will our trend-follower traders.

Many will attest that most breakouts fail, so the price action will need work. However, the technicals suggest the path of least resistance is lower, and when the price is breaking key levels and trending, a simple 3- and 8-day EMA crossover system can keep you in the trade and remove the emotion of taking profits too early.

By way of event risk drivers, on the docket today, we get inflation, which is expected to rise to 3.6% YoY (from 3.5%). We see this as a leading indicator for the print, which is almost at the highest levels since the early ’90s.

However, this data point, regardless of the heat, is unlikely going to move the JPY, given the BoJ’s unwavering stance. That said, it will become more significant as we roll into Q123, with the market putting a huge focus on the end of Kuroda at the helm of the BoJ.

On the US side, as traders kick back to life next week after a mountain of turkey, the US labor market will get our full attention with the report and US .

On the latter, the market expects 200k jobs created, with the unchanged at 3.7% – earnings should fall to 4.6% (from 4.7%).

We’ll have a stronger read on consensus expectations next week. Still, a cooling of the labor market will see both nominal US Treasury yields and real rates fall and potentially even lower the fed funds terminal rate below 5%.

The technicals favor the downside, with conviction increasing below 138.46. One for the radar.

USD/CNH in Focus Amid China Concerns

  • CNH falling due to COVID outbreak
  • FOMC minutes in focus
  • USD/CNH tests key level

The will be in sharp focus later when the FOMC’s last are published, which means the will become even more important given the risks it faces from the latest wave of COVID in China.

USD/CNH Daily

The last FOMC meeting was held before the much weaker than expected October inflation report was published. That report led to a big sell-off in the US dollar and caused stocks, bonds, and to rise sharply. Some Fed officials have already revised their views on inflation and the pace of hikes. So, the market impact of the FOMC minutes might be more subdued than usual.

However, that said, the market will need some clarity after about the terminal interest rates. Additionally, will the Fed signal it will slow down the pace of tightening imminently?

Although the case for peak inflation has grown, the fact that interest rate increases are not yet pausing in the US means the dollar will likely remain supported on the dips.

The USD/CNH faces additional upside risks stemming from weakness in China’s economy, the world’s second largest. There are concerns that China may tighten its COVID curbs further because of the current wave of COVID. Cases have risen to levels last seen in April when Shanghai was put in a stringent lockdown.

Although China relaxed some restrictions, its zero-COVID policy means the threat of more growth-choking lockdowns is there. This is going to hold back the yuan and potentially risk assets across the board.

Now, the USD/CNH has more than made up the losses we saw Friday and again on Tuesday when the sellers stepped in to defend resistance at around 7.1700 – 1.1800 area. If the USD/CNH now breaks above here on a daily closing basis, then this could pave the way for a run toward the next resistance around 7.2293, the base of the recent breakdown.

Meanwhile, if resistance holds, then the next support is seen around 7.1100, followed by 7.1000. If we get there and that level breaks down, then the long-term bull trend line will come into focus again.

Disclaimer: The author does not hold any of the assets mentioned in this article.

FX Outlook 2023: The U.S. Dollar’s High Wire Act

The is tumbling from multi-decade highs. Calling the FX market in 2023 requires taking a view on the Federal Reserve, the war in Ukraine, China, and the overall investment environment. We suspect that the dollar can stay stronger for a little longer. But the main message in our 2023 FX Outlook is to expect fewer FX trends and more volatility

The dollar’s highwire act

Having risen around 25% since the summer of 2021, the dollar has recently taken quite the tumble. For 2023, the question is whether this is the start of a new bear trend or whether the factors that drove the dollar to those highs still have a say.

Given that the most liquid FX pair, , was such a large driver of global FX trends in 2022, we use a scenario approach to look at a range of 2023 EUR/USD outcomes – derived from the expected volatility priced into the FX options market. The range of scenarios and end-year FX levels extend from ‘Permacrisis’, where EUR/USD could be trading at 0.80, to ‘Safe and Sound’, where EUR/USD could be closer to 1.20.

Key inputs to that scenario approach are factors like: i) how aggressive the Fed will be, ii) Ukraine, Europe, and energy, iii) China, and iv) the overall risk environment. Given ING’s house view of the Fed taking rates to 5.00% in early 2023, four quarters of recession in Germany amid higher energy prices, relatively weak Chinese growth, and a still difficult equity environment, our baseline view favours softer EUR/USD levels.

2023 will see fewer FX trends and more volatility

But perhaps the strongest message to get across in our outlook is that FX markets in 2023 will see fewer trends and more volatility. We say this because conditions do not look to be in place for a clean dollar trend – no ‘risk-on’ dollar decline nor ‘risk-off’ dollar rally. And central banks tightening liquidity conditions through higher policy rates and shrinking balance sheets will only exacerbate the liquidity problems already present in financial markets. Volatility will stay high.

Softening global activity and trade volume growth at less than 2% will likely limit the gains of pro-cyclical currencies in 2023. EUR/USD could be ending the year near 1.00. If the positive correlation between bonds and equity markets does break down next year, it will likely come through a bond market rally. Our forecast for US 10-year Treasury yields at 2.75% year-end will argue for to be trading at 130 or lower.

EUR/USD will set the tone for European currencies in general. We favour the to outperform and sterling to underperform. Scandinavian currencies may continue to struggle with the high volatility environment. Further east, we see scope for the Hungarian forint to be re-assessed positively, while the overvalued Czech koruna and Romania leu look more vulnerable as FX intervention slows.

In the commodity bloc, the uncertain outcome for China continues to place a question mark on the and dollars. We again prefer the – although how the housing market correction plays out will be a risk. itself may struggle to sustain a move sub-7.00. And in a more mixed FX environment, expect local stories to win out – one of which may be Korean debt being included in world government bond benchmarks – helping the won.

EUR/USD: Four scenarios for 2023

EUR/USD: Four Scenarios For 2023

EUR/USD: Four Scenarios For 2023

Source: ING, Refinitiv

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

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Chart of the Day: GBP/USD Risks Tilted to the Downside Again

  • Improved risk appetite helps support GBP/USD
  • U.K.’s darkening macro-outlook means risks skewed to downside
  • The key level for bears to defend is 1.20; for bulls 1.15

The managed to rebound along with equities Friday morning as risk appetite improved, even though we didn’t have any major catalysts behind the move in risk assets. The retreated a little, and we had some positive data out of the U.K., which may have helped push the exchange rate higher. 

Still, after the big recovery from an all-time low, the rally looks fatigued. At best, I expect to see only a modest further upside for the cable amid a bearish macro backdrop for the U.K. economy. The medium-term risks are skewed to the downside, in my view.

Before discussing the macro factors further, have a look at the daily chart of the GBP/USD:

GBP/USD Daily Chart

With the cable already testing the 1.20 handle this week, a near-term top may be in. For confirmation, a break of 1.1800 support is needed on a daily closing basis. If that happens, then there are not many other obvious support levels until the base of the recent breakout at around 1.1500 to 1.1570-ish. 

On the upside, a potential break above 1.200 would expose the 200-day average for a test at around the old resistance circa 1.22 handle. 

Risk Appetite Improves

It has been a mixed week for risk assets, with and falling sharply on Chinese demand concerns, while equities have been going sideways in a holding pattern. Although at one point on Thursday, it looked like equities would be heading lower, once again, there was no real follow-through in that move. 

Markets are trying to figure out whether to lean towards the possibility of the Fed tilting to a more dovish stance amid expectations that inflation has peaked or shy away from excessive risk-taking after last week’s big up move and in light of fresh concerns over China—something which weighed heavily on some commodities yesterday. 

Dollar Still Undermined – at Least for Now

FX markets have been reluctant to punish the dollar meaningfully after last week’s big drop on the back of that soft US data. Several Fed officials have spoken this week, again re-iterating their fight against inflation and warning of more to come. 

St. Louis Fed President James Bullard on Thursday said interest rates need to rise further to a 5%-7% range. A day earlier, San Francisco Fed President Mary Daly said a pause in rate hikes was “off the table.” As a result, the market’s pricing of terminal interest rates has gone back to 5% for May through July 2023.

Pound Rises Despite Gloomy U.K. Outlook

The pound may have found additional support from a slight improvement in U.K. data, with topping estimates with a gain of 0.6% month-over-month. Additionally, jobless claims beat estimates earlier in the week, as too did wages data. 

Still, with annual surging to 11.1% from 10.1% previously, real wages are falling. Consumer spending is thus likely to remain restricted. Many economists believe the U.K. is heading into a prolonged recession. With U.K. Chancellor Jeremy Hunt announcing £55 billion worth of tax rises and spending cuts, Britons face more pain for months or even years. 

It is not clear how much of these risks are already priced in. But without a significant improvement in the U.K. macro backdrop, I think the downside risks will prevail for the cable. 

Disclosure: The author currently does not own any of the instruments mentioned in this article.

Chart of the Day: After Rocketing, Polish Zloty at a Crossroads

Concerns of a widening Russia-Ukraine conflict increased today after Poland claimed a Russian rocket landed on a Polish village, killing two Polish citizens. However, President Joseph Biden later told reporters at the G20 summit that the missile was a Ukrainian defense missile.

Surprisingly, given the dramatic developments, there were only mild fluctuations in the . The USD/PLN wavered between a 1.18% intraday high and a 1.73% intraday low.

On Sept. 28, the zloty fell to an all-time low, I assumed, due to the war in its neighboring country. However, the , , and also fell to all-time lows on the same day.

USD/PLN Monthly

USD/PLN Monthly

The USD/PLN has been trading within a constricting monthly rising channel since the February 2009 rebound high, following the July 2008 bottom. The pair has fallen below its 2000 record peak and is retesting the top of the monthly channel. I don’t consider the channel a wedge because that pattern and its traders’ motives take months, not decades.

USD/PLN Weekly

The dollar climbed versus the zloty in a narrower, escalating channel. The lower-than-expected print prompted a dollar selloff last Thursday and Friday, pushing the USD/PLN below the most recent, steepest channel.

The dollar is down for the sixth straight week versus the zloty but is developing a weekly high wave candle, suggesting that the pair could rebound or stall. The location is on the dual support of the previous two channel tops, marked by the X.

If the price rebounds, it could extend its medium-term uptrend at a more sustainable ascent. Alternatively, it could be a short-lived rebound to the 4.8-9 levels, a return move after the steepest channel’s breakout, which could be the making of an H&S top.

USD/PLN Daily

The dollar-zloty pair is potentially forming a rising channel, bearish after the preceding 5% plunge in just two days, as investors’ risk appetite rerouted capital from the dollar haven to risk assets. A flag requires at least five sessions to have stretched the technical spring tightly enough to include all the interest that pulled it down in last week’s selloff to shoot it down again with the same tenacity.

If the pair falls below the flag, at least after Thursday’s close, it will have all the technical energy to fall to the bottom of the next channel. However, if the price breaks the flag to the topside, we’ll have to wait and see whether it will climb above its previous channel or extend an H&S top.

Trading Strategies

Conservative traders should wait for the short-term downtrend to realign with the medium and long-term uptrends.

Moderate traders would short upon the flag’s completion, registering lower than Nov. 15, then wait for a throwback finds resistance by the flag.

Aggressive traders could enter a contrarian trade, buying the USD/PLN at the would-be-flag bottom and turning to sell at the current range’s top.

Trade Sample – Aggressive Long

  • Entry: 4.5000
  • Stop-Loss: 4.4800
  • Risk: 200 pips
  • Target: 4.6000
  • Reward: 1000 pips
  • Risk-Reward Ratio: 1:5

Trade Sample Follow-Up – Aggressive Short

  • Entry: 4.6000
  • Stop-Loss: 4.6500
  • Risk: 500 pips
  • Target: 4.3000
  • Reward: 3000 pips
  • Risk-Reward Ratio: 1:6

Disclaimer: At the time of publication, the author had no positions in the securities mentioned.

Chart Of The Day: USD/JPY Bulls Still Eye 150

  • Repeated intervention fails to deliver intended impact on yen
  • Dollar remains supported thanks to a very hawkish Fed
  • USD/JPY holding above key support in a strong bullish trend

Speculation over China easing its zero-COVID policy boosted sentiment in the first half of Friday’s session. The focus is going to shift to the world’s largest economy with the publication of the report. Among the foreign exchange pairs to watch is the , which looks to end another volatile week on the high, barring a very weak US jobs report or another big intervention from the Japanese government. Even if another intervention takes place, this will unlikely have a lasting impact—as we have seen in the previous cases.

For now, the USD/JPY is holding its own rather well, above its 21-day exponential moving average and key support around 145.00 -146.00 area.

USD/JPY Daily

With price holding support and making higher highs and higher lows, there’s no technical reason for the bears to step in yet, not until something changes fundamentally. Therefore, the path of least resistance continues to be to the upside, and we could see the USD/JPY climb above the 150 handle in the coming days.

The USD/JPY made back its initial losses in the aftermath of the FOMC’s fourth consecutive 75 basis point on Wednesday. Although we saw more signs of weakening economic data on Thursday, this was ignored by USD/JPY traders. The persistence in inflation is preventing the Fed from pivoting to a dovish stance, which is why FX traders are ignoring weakness in US data—at least for now. As Powell made it clear at the FOMC press conference, the Fed expects to raise interest rates even higher than previously thought. This is because remains stubbornly high, and employment is also very strong. Will the October nonfarm payrolls report continue to show strength in the labor market today, or buck the trend?

As the continues to rise, foreign currencies keep tumbling one after another. No other major currency had it worse than the yen in recent times, thanks to inaction by the Bank of Japan (BoJ).

To be fair, it is a very difficult task to defend your currency as normal central bank actions just don’t work or are not feasible when stagflation is so bad. Most central banks have had no option but to either let their currency slide or tighten interest rates to prevent the interest-rate differential against the US not to grow too large.

By keeping its monetary policy extraordinarily loose, this is exactly what the BoJ has achieved: a slumping currency. But this is not good when you are importing things priced in US dollars, for example .

So, Japan’s government has had to step in to intervene by selling the dollar reserves it holds. But this hasn’t proved to be very effective. Selling dollar reserves is just a short-term fix. Investors know full well that dollar reserves are not unlimited.

The only way this trend can reverse is when the Federal Reserve pivots to a dovish stance, which can happen for two main reasons: weakening inflationary pressures or a severe recession—neither of which are very likely at the moment. So, the onus is on the BoJ to change tack—and it has repeatedly refused to do that. The USD/JPY is thus likely heading for 150-plus.

Disclaimer: The author currently does not own any of the instruments mentioned in this article.

Chart Of The Day: Dollar Likely To Advance To 115

The Federal Market Open Committee increased by 0.75% for the fourth straight time yesterday. This hike pushes the top of its target range to 4%, the highest since 2008. Therefore, traders raced into trading the in an arbitrage-like fashion so they could reprice the market-implied peak in interest rates for 2023. I have previously warned readers to avoid the market herd that changes its opinion according to the short-term trend.

The US Dollar is penetrating the top of its falling wedge today, completing a continuation pattern, bullish in an uptrend.

US Dollar Index Daily

The wedge is similar to a triangle pattern. However, while the triangle’s trend lines diverge the wedge’s trendlines move in the same direction. This subtle difference illustrates the vastly different motivations of traders, which is driving the dollar’s current range.

Note that both the highs and lows within the structure point downwards, demonstrating that sellers are in charge. However, given that the lows are not keeping up with the same rate of descent as the highs, traders begin to lose patience.

That is what happened on Oct. 21, when the price penetrated the pattern top. However, it closed lower, well within the range. If today’s trading remains above the pattern, it will show that bears are slipping. A decisive upside breakout will complete the pattern and put market forces back within the uptrend, ending the wedge’s temporary disruption.

Trading Strategies

Conservative traders should wait for the price to penetrate 114, then wait for a three-day filter to reduce the risk of a bull trap, during which the price remains above the pattern, then return and successfully to confirm the pattern’s completion, with at least one long, green candle. When that occurs they can risk a long position.

Moderate traders would be content with penetration above 113.50 and a two-day filter, then wait for a return move for the better price, if not for added confirmation.

Aggressive traders could buy after a close above the pattern.

Trade Samples – Long Positions

Aggressive

  • Entry: 113.00
  • Stop-Loss: 112.50
  • Risk: 50 pips
  • Target: 114.50
  • Reward: 150 pips
  • Risk-Reward Ratio: 1:3

Moderate

  • Entry: 112.50 (after penetrating 113.50, 2-day filter)
  • Stop-Loss: 112.00
  • Risk: 50 pips
  • Target: 114.50
  • Reward: 200 pips
  • Risk-Reward Ratio: 1:4

Conservative

  • Entry: 111.50 (after closing above 114, 3-day price filter)
  • Stop-Loss: 111.00
  • Risk: 50 pips
  • Target: 114.00
  • Reward: 250 pips
  • Risk-Reward Ratio: 1:5

Disclaimer: The author currently does not own any of the instruments mentioned in this article.

Chart Of The Day: USD/JPY Set For Revisit Of 150s?

  • BoJ inaction means policy divergence grows larger
  • Japan government intervention ineffective
  • Dollar rebound amid haven flows

By standing pat on monetary policy despite the recent inflation spike and slump, has the Bank of Japan (BoJ) paved the way for USD/JPY to reach 150-plus?

Before discussing the BoJ’s inaction, let’s take a quick look at the daily chart of the USD/JPY, which is on the rise again and undoubtedly raising alarm bells for the Japanese government after their recent attempts to stem the yen’s drop:

USD/JPY Daily

Following the latest Japanese government intervention that drove the USD/JPY to almost 145.00, the popular FX pair managed to rebound off its lows on Thursday as the US dollar made a comeback amid haven flows after technology stocks sunk on the back of their poor results. The USD/JPY formed a doji candle on Thursday, before breaking higher in the early hours of Friday’s session.

The reversal means the USD/JPY may have resumed its long-term uptrend after the recent volatility.

The focus for yen traders was on the BoJ, and especially on whether the central bank would deliver a surprise and drop its yield curve control policy. Japan has been importing more and more inflation as foreign goods and services would cost more with the recent upsurge in USD/JPY and other JPY crosses, putting significant pressure on the yen. Yet, the BoJ has once again refused to alter its extra-ordinary , despite the rest of the world changing theirs to a significantly more contractionary stance—not least the US , which is set to hike rates by a fourth consecutive 75 basis points next week.

This—the diverging policy stance of Japan with the US (and the rest of the world)—has been the main reason why the USD/JPY and other yen pairs have rallied so sharply. But by relying on government intervention to stem the yen’s decline, this has proved to be quite ineffective so far. Thus, there is no reason for the USD/JPY to head significantly lower under the current macro environment. The path of least resistance is still to the upside.

Barring further government intervention, the USD/JPY could easily revisit and surpass the 150.00 handle again, with an accelerated move now that the BoJ has effectively decided to allow the currency to devalue further.

The USD/JPY has also been helped in part by the dollar’s rebound across the FX space. US bond yields are on the rise along with the greenback, while stock index futures have extended their falls, after Amazon (NASDAQ:) became the latest tech giant to report poor results. If the stock market sell-off continues today, which is likely in my view, I would imagine this would further put pressure on the , and thus help support the USD/JPY even more.

Disclaimer: The author currently does not own any of the instruments mentioned in this article.

Chart Of The Day: The Case For The Euro

The European market is gearing up for a jumbo by the European Central Bank. The expectation is weighing on the Index as investors expect the to strengthen following the rate hike.

A stronger EUR/USD may create two headwinds for European corporates:

  • European exports become more expensive making them less competitive.
  • Rising rates reduce demand for goods and services which dents corporate profitability. It could also result in a hiring freeze, wage reductions or even layoffs.

When a central bank hikes rates to slow an economy that is expanding too quickly, a recession is always a risk.

Despite easing in natural gas prices, European remains around record highs so the ECB is expected to raise rates at 8:15 EST by 0.75% to 2.00%, its highest over a decade.

And we can see that these expectations are affecting demand for the euro.

EUR/USD Daily

The price breached its falling channel’s topside on Tuesday, establishing a short-term uptrend. However, the medium downtrend is still falling. It found resistance beneath the 100-day moving average (DMA) for the second day, having neared the top of a potential rising channel. The point where both channels meet could be a good place for support.

Trading Strategies

Conservative traders should wait for the falling short-term to synchronize with the rising medium-term trend. That will happen either when the medium-term contains an increasing series of peaks and troughs or when the short-term trend’s peaks and troughs return to a decline.

Moderate traders would buy the euro after it demonstrates accumulation at the bottom of the short-term rising channel (green) and the top of the medium-term falling channel (red).

Aggressive traders can short, assuming that if the euro rose on expectations of higher rates, it will fall on the news, even harder if the news is not what traders were expecting. Technically, the second-day resistance by the 100 DMA increases the chances for a drop. Finally, it is a good trade from a risk-reward perspective.

Trade Sample – Aggressive Short

  • Entry: 1.0050
  • Stop-Loss: 1.0100
  • Risk: 50 pips
  • Target: 0.9900
  • Reward: 150 pips
  • Risk-Reward: 1:3

Disclaimer: The author has no position in the instruments mentioned in this article.