Setback In China Trade, USD Longs To Start The Week

The Sterling is roaring ahead, so is the Euro as a new weeks gets underway. The Aussie remains the weakest currency as the RBA minutes hint more rate cuts ahead. The risk-off currency complex, especially the Yen, finds renewed demand flows as the US-China trade deal prospects are dominated by pessimism again. Want to stay up to date with the latest, including trade setups? Then this report is for you.

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

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Quick Take

The Pound keeps charging higher to start the week as polls indicate the Conservatives lead ahead of the UK general election expands while UK PM Johnson confirms that all conservative candidates have vowed to support the deal to exit the EU. The Euro is also off to a solid start with demand flows consistent with the view that if history is any indication, the printing of a monthly outside bar in Oct represents a clear risk of a shift in bias on dips. One can find the rationale for this view in the charts section. The appeal towards funding currencies has returned, fueling the momentum of the EUR further, but also allowing a recovery in the JPY and CHF as CNBC reports that China is growing pessimistic on a trade deal prospect. The headline trumped the progress made by the Oceanic currencies during Monday, with the Aussie especially punished after we also learned that the RBA minutes left the door wide open for an near-term rate cut, a view reinforced by the recent big miss in the Aussie jobs last week. The behavior in the North American currencies, especially the sell-side flows noticed in the US Dollar, was another highlight on Monday. A combination of negative US-China trade headlines, the strength in the EUR/USD, which inevitable drags the USD index down with it, alongside the theories doing the rounds that a meeting between Powell and Trump that took place on Monday implies either Trump pondering the idea of walking away from a China deal, hence assessing the situation with Powell, or simply further pressure to ease. Regardless, the market's reaction was to bid up stocks from the lows reached intraday after the Chinese news and dump the US Dollar in response. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

Back and forth in US-China trade talks: According to CNBC, China is growing pessimistic on trade deal prospect. CNBC detailed that “the mood in Beijing about a trade deal is pessimistic due to President Donald Trump’s reluctance to roll back tariffs, which China believed the U.S. had agreed to, a government source told CNBC’s Eunice Yoon.” At the margin, the news that the US will extend licenses to sell to Huawei for 90 days was a positive development that will help to keep the ongoing trade talks alive.

Funding currencies find demand flows: The funding currencies (EUR, JPY, CHF) all benefited from the shift in sentiment, as the US-China trade talks remain the primary thematic to dictate the risk profile. However, the US stock indices remain unfazed, trading at the tune of its own drums near record highs.

Fed Powell and President Trump met on Monday: The statement read that “Chair Powell's comments were consistent with his remarks at his congressional hearings last week.” It confirmed that Powell “did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming information that bears on the outlook for the economy.” Finally, Chair Powell said that he and his colleagues on the Federal Open Market Committee will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis.

Stocks see the meeting as positive input: Talks between Trump and Powell were the driver that saw stocks recover from the early dip due to the Chinese news. One of the theories may be that Trump is looking to flex his muscle to talk the Fed into more cuts., even if we all know Powell remains unfazed by his 'cordial' threats. Another theory that caught my attention, reported by Forexlive, is that Trump may want to feel out what would be the Fed stance is he were to walk away from the phase one trade deal.

RBA minutes skewed to the dovish side:  The latest RBA minutes was far from encouraging and saw the AUD sell off as the market continues to fully walk back the idea that the RBA will refrain from cutting rates any further. The board is prepared to ease policy further if needed, adding that the board agreed "case could be made" for a rate cut at the November meeting. The board decided rates should be held steady "at this meeting", which implies it won't necessarily be the case going forward. Intention is to keep easing. Besides, the board recognised "negative effects" of lower rates on savers and confidence, which is another negatively-charged headline the market is discounting.  

GBP outperfoms in FX: The Pound was given a boost as polls indicate that the Conservatives lead ahead of the UK general election expands after the helping hand by Brexit Party’s Nigel Farage. The confirmation by UK PM Johnson that all conservative candidates have given their word to support the deal to exit the EU was also welcoming news.

The USD broadly sold: The USD is weak across the board as the headlines on the trade deal and a considerable decline in US yields tames capital flows into the world’s reserve currency. The bullish cycle in the EUR/USD, where flows remain one-sided to the upside, is exacerbating the pain.

Light calendar today: The calendar is vacant of high-stakes risk events. Canadian manuf sales and US building permits/housing starts are the main events to contend with.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

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The first trade I got filled this week is a short in GBP/USD. I’ve placed an ample stop of over 85 pips aiming for an initial target of 1.2905. The rationale is due to the following observations:

  • The pair has reached its 100% measured move on the weekly chart, which if one notices, is the level in the chart where the initial explosion in GBP demand came to a halt.
  • There is a monthly area of supply right overhead backing the case for short positions to find clusters of offers should the price keep heading higher.
  • The weekly market structure remains bearish as the last leg lower in early 2019 is still the primary cycle that anchors the macro bearish outlook. Invalidated above 1.3420.
  • The last leg lower off the daily chart saw a successful rotation, which makes the breach of the prior swing high as seen on Monday an area of technical value to engage.
  • The psychological level of 1.30 resides right above the entry, which adds to the odds of the market finding interest to revert the momentum around this vicinity.
  • The last breakout of a bracketed area in the H4 chart showed a 100% measured move confluent with the area where the weekly 100% measured move comes at.

The chart I keep an eye on to start the week even if the price keeps moving further away from my entry is the EUR/USD. I am looking to exploit buys of EUR inventory on weakness due to:

  • The Oct candle formation was a monthly bullish outside candle. There have been 10 instances since the GFC that this pattern has occurred. Without exception, as I show in the following video, the next few months at the minimum, the directional biases has turned towards the direction of the outside bar formation.
  • The pair is bouncing off a level of weekly demand with the strong departure in May 2017 as the reference to identify that imbalance. This is the demand area in control now.
  • The market structure in the weekly has shifted to printing higher highs, with the buying of Euros off the lows last week further evidence that the market is looking to further validate the bullish structure by carving out a higher low (more work needs to be done).
  • The pair has found re-invigorated buy-side interest off the round number 1.10 after approaching the level in a compression pattern, which communicates the re-balance of short and accumulation into long side positions.
  • Any reinstatement of longs on setbacks finds strong and fresh areas of demand as a backup starting at the 1.1020/25 as seen by the blue box followed by pool of liquidity where a cluster of bids is also expected to protect the downside.

In the last European session on Monday, I was sidelined looking for a potential stop-loss run in the USD/CAD, and that’s precisely what I got even if the trade failed short of my target, leaving me empty-handed with a scratch trade at break even. I also touch on a short position I am looking to trade if the price can make it all the way to 1.33. The rationale was as follows:

  • The daily market structure is clearly up after the market broke through a swing high on Nov 7, forming a level of liquidity on the way down after several attempts to break lower.
  • If price were to break down that level (blue line) with a rejection and re-take of the order block that led to the breach of the lows, I’d be looking to engage on a retrace.
  • I tend to target the 50% extension but since the stop loss size this time was too tight, I prefered to expand it to around 10 pips with a 100% measured move. It never happened.
  • While the short off 1.33 will be reassessed on a daily basis depending on risk events, the area of confluence could not be passed this time. We have a fresh supply area, a 100% measured move off the daily, a round Number, while in the context of a barish cycle still the dominant profile in terms of market structure in the USD/CAD.

Important Footnotes

  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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