ECB in focus as we start the week with strong USD sentiment

What Happened Yesterday

The US dollar made its biggest daily gain in a month on Friday as progress on U.S. tax reforms raised prospects of a fiscal lift to the economy.

The USD hit a three-month high against the Yen, to 113.56, and a five-month high against the Swiss franc, touching 0.9858. Traders seek the Yen and Swiss franc in times of uncertainty and fear, and sell the currencies when they favor riskier assets.

Senate approval of a budget blueprint on Thursday for the 2018 fiscal year cleared a critical hurdle for Republicans to pursue a tax-cut package without Democratic support.

Traders also have viewed as bullish for the USD remarks this week from Chair Janet Yellen and other officials of the Federal Reserve that suggest the central bank is moving forward with another rate hike this year.

The US dollar’s strength dragged the Euro down to $1.1760 ahead of a European Central Bank meeting this week in which policymakers are seen cutting bond purchases but voting for an extension in stimulus.

Enhanced risk appetite also helped boost the Euro to its highest against the Swiss franc since January 2015, when the Swiss National Bank scrapped its peg with the Euro.

The Canadian dollar suffered its biggest drop in nine months against the USD on Friday, after domestic data showing a drop in retail sales added to expectations that the Bank of Canada will leave interest rates on hold this week.

Retail sales fell by 0.3% in August from July, pointing to a slowdown in growth after a hot first half of the year.

Separate data showed that Canada’s annual inflation rate increased to 1.6% in September from 1.4% in August, matching forecasts, but well below the Bank of Canada’s 2% target.

Perceived chances of another rate hike at next week’s policy decision slipped to less than 20% from 27% before the data, the overnight index swaps market indicated.

The currency touched its weakest since Aug. 31 at $1.2630. For the week, it fell 1.3%.

Sterling bounced back from an eight-day low against the Euro on Friday, with traders hopeful of a breakthrough in Brexit negotiations after British Prime Minister Theresa May won a modest reprieve in stalled talks with the European Union.

EU leaders said at a summit in Brussels that they would begin preparations to move into the second phase of Brexit talks in December, a step forward that would allow London to discuss its future trade relationship with the bloc.

Against a stronger USD, the pound recovered from a two-week low, trading up 0.3% on the day at $1.3200. The pound strengthened to 89.35 pence per euro, having earlier dipped to its weakest since Oct. 12. That left it up 0.8% on the day.

Ahead of national elections in Japan on Sunday, surveys suggest Prime Minister Shinzo Abe’s ruling coalition is on track roughly to match the two-thirds “super majority” it held in parliament’s lower house before the snap vote was called. 

The New Zealand dollar sank to a five-month low on concerns the new Labour coalition will take a harder stance on immigration and foreign investment than the outgoing center-right government.

This Week’s Fundamental Drivers

It’s going to be an important week with both the ECB & BOC meeting this week.

The market has been waiting a long time for the ECB’s blueprint on reducing stimulus. If they under deliver we could see new lows for the Euro and Euro crosses.

Pressure is off the BOC after recent weak data but there’s still a slight chance for a hike so you can expect major volatility around the release.

Technical Set Up – What’s Happening with the Majors

The USD had a good day against all currencies with the British pound the odd one out, rallying on positive sentiment from Brexit negotiations.

AUDUSD

Eventually broke down through 0.7840 and starts the week on the back foot. CPI data due on Wednesday is the major focus.

Check our detailed AUDUSD Analysis

NZDUSD

Broke down through some major support levels (0.7068 & 0.6975). Any further weak NZ economic data this week and it will slide a lot further!

Check our detailed NZDUSD Analysis

USDJPY

Rallied on the back of the US senate news. It took a while to break 113.20 but now it has, it’s opened up a run at 114.50. Japanese government elections on the weekend will be the markets main focus to start the week.

Check our detailed USDJPY Analysis

EURUSD

Drifting lower with general USD strength. Thursday ECB meeting will be the major focus for traders but don’t forget geopolitical issues in Spain may hang over the Euro.

Check our detailed EURUSD Analysis

GBPUSD

Bucked the USD trend on Friday as geopolitical ‘Brexit’ news supports Sterling. Focus switches to GDP data Wednesday.

Check our detailed GBPUSD Analysis

USDCHF

Tracking the USD index point for point. Keep an eye out for North Korea news as I believe this geopolitical issue is far from resolved.

Check our detailed USDCHF Analysis

USDCAD

Weak Canadian data has the Funds charging to the topside. Thursday BOC meeting will be the highlight for the week.

Check our detailed USDCAD Analysis

Today’s Focus – Major Currencies in Play

You need to follow the economic data releases & best technical set ups to work out where the majority of action and interest will be.

EURUSD

Technical Set Up: Support @1.1750 & Resistance @1.1873

Fundamental Driver: Germany – Federal Diet Election & Buba Monthly Report

Potential Strategy: Chnace for Range trade as long as there are no surprises in the two events.

Check our Next Best Trades list for full details.

Summary

It should be a pretty quiet start to the week as the market awaits results of the Japanese & German elections.

The USD closed the week on a positive note on the back of potential Tax reforms. So from here on out we really need to keep an eye on this story as it evolves.

Wednesday & Thursday look to be the best trading days with the ECB meeting the major focus for the market.

Tune up your charts & get ready to trade…..see you in the 247 Trade Zone!

Brad

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