All eyes on the Fed – how much dovishness is enough to drive the USD lower?

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  • 30.07.2019
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Economic Events July 29 – August 2, 2019

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Source: Economic Events Calendar July 29 – 02 August 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

The DAX saw some serious strength before the ECB rate decision last Thursday, anticipating the delivered dovishness and it only seemed a question of time when we would see new yearly highs.

But after the ECB delivered as expected, the German index sharply turned around and gave back most of its previous gains – a classic ‘buy the rumours, sell the facts’ in our opinion.

That said, we want to bring back a point which we already brought up in our last weekly market outlook: here, we pointed out that the DAX30 CFD had some serious issues to gain bullish momentum after more and more signs hinted to a dovish ECB last Thursday.

And after the German index now failed to push above 12,600 points, but instead saw a sharp drop, DAX bears are probably smelling some kind of a chance.

Technically, the key level can still be found around 12,150 points. As long as the bulls can keep the German index above that level, chances are still given that we get to see another attempt to break above 12,650 points.

But with the ECB having delivered as expected and increasing signs of the Fed delivering a 25 basis point rate cut, but not more, an attempt to break below 12,150 points is a serious option and further losses down to 12,000 points would be on the agenda.

Though, we should keep in mind that significant volatility within the blackout period of the Fed and waiting for their rate decision on Wednesday, is limiting the downside potential with bulls seeing historically a window within which Equities usually perform solid, increasing chances that the DAX30 CFD will minimum hold above 12,000 points:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between April 17, 2018, to July 26, 2019). Accessed: July 26, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US dollar

The main event of the upcoming days will clearly be the Fed rate decision on Wednesday. After the Fed Watch Tool saw a little rollercoaster after some comments from NY Fed president Williams on the 18th of July with the expectations of a 50 basis points rate cut spiking up to around 70%, but coming back to around 25% (or market participants expecting the Fed to cut rates by 0.25% with a likelihood of 75%) last week.

In our opinion, the main focus on Wednesday will be on the rhetoric of the Fed statement and how it will be interpreted: after US GDP Growth Rate data came in at 2.1% and thus above expectations, markets could potentially price out a fourth rate cut in 2019 and that said, trigger some serious USD strength after the dovish remarks from the ECB last week, knowing that the Euro accounts for 58% of the weight in the USD Index Future (further details in the paragraph below).

If in addition to that economic data around the Fed with the ISM Manufacturing on Wednesday or Non-Farm-Payrolls on Friday showing positive signs, further fuel for USD bullishness could be delivered.

That said, it wouldn’t come as a surprise to see the USD going for another test of the region around 98.00 points and probably a break higher.

Still and technically, the picture in the USD Index Future stays neutral between 95.00 and 98.00 points:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between May 2016 to July 2019). Accessed: July 26, 2019, at 10:00pm GMT

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Euro

As pointed out in our weekly market outlook last Monday, we expected the ECB to use a very dovish rhetoric in her statement at her rate decision last Thursday.

And she delivered as expected: while the ECB kept interest rates unchanged, it adjusted its forward guidance in a way which allows rate cuts, but also rate tiering (to relieve pressure on European banks resulting out of a collapse in yields) and QE in the near-term.

In addition to that, the mentioning of inflationary pressures which have been persistently below levels that are in line with the central bank’s aim (note: 2%) and that as long as that’s the case the ECB will adjust all of its instruments, as appropriate.

With that said, further monetary stimulus should be expected, probably already in September and here with the European Central Bank lowering interest rates into negative territory.

Based on that, the overall outlook for the EUR/USD stays bearish in the days to come, even though a break below 1.1100 didn’t happen last week.

We carefully watch the region around 1.1180/1200 as a potential Short-trigger, against which a sustainable break below 1.1100 could be anticipated. Only a push back above 1.1280/1300 could brighten the outlook a little:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between June 4, 2018, to July 26, 2019). Accessed: July 26, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

JPY

With the upcoming Fed rate decision on Wednesday, but also some interesting economic news events like the ISM Manufacturing or Non-Farm-Payrolls, USD/JPY traders faces a very exciting trading week.

After the Fed Watch Tool saw some heavier swings after some comments from NY Fed president Williams on the 18th of July with the expectations of a 50 basis points rate cut spiking up to around 70%, but coming back to around 25% (or market participants expecting the Fed to cut rates by 0.25% with a likelihood of 75%) last week, USD/JPY stabilised and went back above 108.00.

While we saw a serious chance of an attempt to mark new yearly lows and a run down to 105.00 in the weeks/months to come (which is still a serious option, especially if some kind of risk-off mode hits the markets), short-term, the picture in USD/JPY brightens a little.

If we get to see a price out of a fourth rate cut in 2019, resulting in some serious USD strength and in addition to that economic data around the Fed with the ISM Manufacturing on Wednesday or Non-Farm-Payrolls on Friday show some positive signs, the currency pair could go for a stint up to 109.00.

Still, below 109.00 the picture stays neutral to bearish and a break below 106.80 with further losses down to 105.00 is an option:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between November 27, 2017, to July 26, 2019). Accessed: July 26, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

Gold

After the short push to new yearly highs in Gold after the comments from NY president Williams on July 18, which saw a spike in market expectations of a 50 basis point cut up to 70%, these expectations stabilised again around 75% for a 25 basis point cut.

Going hand in hand with that, Gold stabilised, as expected between 1,400 and 1,450 USD, too, currently waiting for the Fed rate decision on Wednesday.

What’s potentially interesting now is, that the market has nearly completely priced in any dovishness from the US central bank, limiting in our opinion the upside potential in the yellow metal up to 1,480/490, especially if in addition to that the upcoming US economy data sets show any positive signs, pricing out chances of four rate cuts in 2019 with the first being delivered on Wednesday.

Still, we maintain our mid-term bullish Gold bias, especially as long as we trade above 1,380 USD, while a push below leaves us considering the region around 1,360/365 as a potential long-trigger:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between April 7, 2018, to July 26, 2019). Accessed: July 26, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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