Powell speaks and markets speculate about 4th rate hike from the Fed. USD resumes near-term uptrend. EURUSD testing key support.

Summary

• USDCAD: Dollar/CAD has a bid tone to it as we enter NY trading this morning.  This comes on the heels of a strong, broad based, USD rally that played out during Powell’s testimony on capitol hill.  While we feel the market got ahead of itself here (speculating about a 4^th rate hike from the Fed this year just because Powell didn’t say anything negative), we cannot argue with price action and how easily the broader USD made quick work of resistance levels against CAD, AUD, EUR and GBP.  USD longs might be setting themselves up for disappointment come the next FOMC meeting in March, but for the time being the broader trend of the USD remains higher.  Yesterday’s NY close for USDCAD was as positive as it can be, but the market is stalling a bit now as we’ve hit a Fibonacci resistance level in the 1.2770s.  On deck today in the NY session are some minor Canadian data points (Industrial & Raw Material Product Prices), the 2^nd read of US GDP for Q4 2017 and the Chicago PMI.  We think USDCAD waffles around a bit today, hugging the 1.2760-1.2780 range, and potentially backs off a bit should EURUSD regain the 1.2240s.  Should the EURUSD resume its downward trend of late however, we think this will propel USDCAD higher into the 1.2820s (next trend-line resistance level).

• AUDUSD: The Aussie had a rough session yesterday, trading lower alongside EURUSD and the other majors as Powell spoke.  Monday’s negative chart pattern still looms large and so yesterday’s move lower was not surprising from a technical perspective.  The market is finding a bid this morning however, but it seems to be option related more than anything else (1.3bln AUD at 0.7800 rolling off at 10amET).  AUDUSD has held trend-line support in the 0.7780-0.7790s.  A Fibonacci retracement level at 0.7815 is capping at this hour.  There’s more resistance at 0.7825-30, then the 0.7850s.  We think the AUDUSD hangs in there until 10am and will then be at the whim of EURUSD and copper traders as usual.  Copper is still searching for support after yesterday’s sell-off.  China’s Manufacturing PMI for February came in at 50.3 (vs expectations of 51.1).  This is another AUD negative.

• EURUSD: A whole bunch of narratives are flying around over the last 24hrs as to why EURUSD fell apart yesterday (more hawkish the expected tone from Powell, overextended EUR long positioning, wide US-over-German interest rate spreads, dip in German CPI), and while it sounds nice, the first point is arguable and the other points are old news and haven’t been driving the trade of late.  We think yesterday’s move was simply a bit of overexcitement over what the Fed will do this year, and it led to support levels being broken.  When those levels broke, if gave traders an excuse to push EURUSD lower.  Open interest in EUR futures at the CME actually went up, suggesting new shorts piled in (contrary to what some reporters are saying about traders wanting to take risk off the table ahead of the eventful weekend ahead in Italy and Germany).  Whether we like it or not though, the EURUSD trend remains lower after the bearish reversal pattern recorded on Feb 16.  EURUSD tried to regain the 1.2230s in overnight trade (two converging trend-line support levels), but it failed and so the market is now struggling to find support at the February lows of 1.2200-1.2210.  There’s a 1.3bln EUR option expiry at 1.2200 for 10amET this morning and so that might keep things heavy until then.  EURJPY continues to be a slow motion train wreck; breaking decisively below 131.25 in overnight trade (this was also a major weekly support level).  USDCNH is not helping the cause, sitting stubbornly bid above 6.32.  We think EURUSD might to try recover here a bit today, but it might have trouble in the 1.2230-40 area.  It needs to recover today and tomorrow we might add, or else it’s a long way down to the next support level, which is the 1.2140s (that kind of a move might finally get some entrenched EUR longs to capitulate).

   

Tune in shortly @EBCTradeDesk for this morning’s update on GBPUSD and USDJPY.

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About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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