Today has been a great day for trading the forex markets, assuming you were on the right side of the trade. Waiting for the news to settle is probably best but some speculators have clearly made some good ground with their trades as the AUDUSD has moved around 80 pips and the EURCAD moved over 100 pips this session. Central Banks were not as Hawkish as they could have been and clearly, the Federal Reserve will have to move before the likes of the ECB can.
The ActivTrades retail sentiment indicator shows that 61% of the traders on the platform are bearish of the EURUSD. That is enough for contrarian traders to look for ways to get long but it is not as extreme a level as we have seen on the CAD crosses.
Today’s move in the EURUSD in my opinion has been designed to stop as many of those bearish traders out as possible ahead of the FOMC, at which point I think they will be shaken out and allowing a possible resumption in the downtrend to occur. This afternoon was mainly about the ECB until the US data started coming through and I don’t think the ECB did enough to warrant a bullish euro like we have seen today. The European Central Bank (ECB) announced that the interest rates on the main refinancing operations, interest rates on the marginal lending facility, and deposit facility, will remain unchanged at 0.00%, 0.25%, and -0.50% respectively. They additionally indicated that it would continue to buy through PEPP, at least until the end of March 2022, and "until it judges that the coronavirus crisis phase has ended," but at a "moderately lower pace." President Lagarde said that volumes of QE matter more than duration. So hardly Hawkish?
While admitting that there may be a "transitory period when inflation is slightly above target," the ECB does not intend to raise interest rates until inflation reaches 2%, well ahead of the end of its projection period. In fact, none of the board members voted for a rate hike in 2022 at this meeting. Additionally, the bank intends to reinvest the principal payments from maturing securities purchased as part of the asset purchase program "for an extended period of time", after it starts raising interest rates, and "for as long as is necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation."
The EURCAD has clearly reversed along with the rest of the euro complex, which in this case will please the 98% of retail traders who are long the currency pair. For me, the real test comes from the resistance levels and moving averages above. This is where I see this bear trend resuming.
The US dollar index declined heavily today, impart because of the move into the euro but mainly down to the GDP data. The US Bureau of Economic Analysis announced in its first estimate for the third quarter that the country's gross domestic product (GDP) increased by 2% annualized, missing analysts forecasts of a 2.7% increase.
The trend indicates a significant slowdown compared to the second quarter when GDP grew by 6.7%. Personal consumption expenditures (PCEs) increased by 5.3% in the advanced figure, down from last quarter's 6.5%. The Core PCE price index, (excluding food and energy), decreased from 6.1% to 4.5% in the second quarter. But none of this should be a shock when you consider the amount of direct stimulus that has been removed since the previous quarter. And the flows from March from the government have reduced from nearly $950 billion down to around $500 billion. The GDP equation takes into consideration both government spending and private-consumption expenditure, both of which are down. Plus, the USA has an increased trade deficit which is negative on the GDP figure.
The number of Initial Jobless Claims (IJC) in the United States for the week ending October 22 dropped by 9,000 from the previous week's (marginally revised) level to 281,000. This is good news! The figure remains well above the 212,000 reported in early March 2020 and is currently at a 19-month low, which shows how hard it is for the U.S. economy to get fully back to pre-pandemic employment levels. 194,000 new jobs were created this week, down from the yearly average of 607,000 which will be a worry for policymakers, looking to maximize employment.
Further US dollar volatility may come from today’s possible votes on President Biden's infrastructure bills. The US house speaker Nancy Pelosi is keen to have a vote on the Infrastructure Bill today, but Senator Sanders says that the house should not vote for an infrastructure bill without clear language on Biden's budget reconciliation package.
One pair that is really enjoying the weaker dollar is the commodity-focused AUDUSD.
The AUDUSD has been able to maintain above the daily 200 ema and is set to test the old support level from the H&S pattern that formed in the first half of 2021. If for some reason the Fed doesn’t deliver on the expected Hawkish monetary policy next week, the right-hand shoulder of the pattern becomes a target. Way up at 0.792, some way off but also something to keep in mind if you are a trend follower.
Apple, Amazon, Comcast, and Spotify are some of those reporting their earnings, so we should expect more volatility in the US equities too.