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UK Data gives the pound a nice boost

Today is the week's main day for Tier 1 data releases. We may get some moves this morning that gets unwound on the FOMC announcement, so trade carefully. Or wait until all the data is out.

Morning Brief

Traders and investors alike are hoping that today is going be the day the G10 forex pairs move out of their consolidation ranges. If there is to be a significant move, it will happen most likely at the FOMC rate decision announcement as traders assess the economic projections, dot plots, and react to the following press conference. As always, the algos jump on word changes, and ‘Taper’ could be the word of the day.

In the overnight session, the Japanese trade balance for May declined as imports shrank. Their exports increased the most since the 1980s and today’s report was the 3rd straight month of growth in sales. The good news is machine orders are up more than a year ago but that is due to base effects, the increase month on month was a disappointing 0.6% compared to a consensus prediction of 2.5% or above.

The USDJPY price action has found resistance once more at the 110.00 level and if it closes lower today, we may be seeing a lower high being formed, which would then be a possible start of a breakdown of this rising channel that we have been in since April. If that is what retail traders are seeing, that would explain why the sentiment indicator on ActivTrader is showing quite a large majority of traders bearish the pair. As this indicator shows rising bearish sentiment the more, I am looking for opportunities to get into a long when traders get trapped short. Now is not the time to make the trade as we could see a bit of a pullback but if the 109.20 holds, we could be looking to enter a trade long.

This morning’s news from the UK around inflation shows that year-on-year inflation is up 2.1% and core is at 2%, so we’re now at the Bank of England’s target and showing 4 consecutive months of rising inflation. The largest upward contribution to the CPIH 12-month inflation rate came from transport, followed closely by a rise in Recreation and culture. On a monthly basis, CPIH rose by 0.5% in May 2021, compared with little change in May 2020.

UK PPI data also shows input prices increasing at the factory with those increases in prices being passed on and accepted. The PPI readings have been rising for 8 straight months from a low of -1.7 in September 2020, to 4.6 in May 2021.

The GBPUSD daily chart could be signaling that the price action had a look below the May consolidation range over the last couple of days and I would expect a continuation higher if we can close above yesterday’s high following the FOMC tonight. The sentiment indicators show that the bulls and bears are still relatively equally matched which is a result of the prolonged sideways movement.

This afternoon we will receive Canada’s latest inflation report with expectations for a rise likely to be beaten by the increasing cost of energy. In April Canadian inflation jumped to 3.4% as price increases accelerated from the cuts during the pandemic. The Bank of Canada is expected to raise rates in H2 of 2022 and will be basing their decision like most central banks on how well GDP is performing with relation to the coronavirus and labor market metrics. They currently view the strengthening CAD and rising inflation as temporary and would expect inflation to top out around 3% before reversing lower.

The ActivTrades sentiment indicator for the USDCAD has an extreme reading of 88% of traders on the platform bullish the pair.

The USDCAD has been in a downtrend and continues to trade at multi-year lows with 1.2180 currently acting as a price ceiling. There is a market structure above at 1.2350 and we have the Ichimoku cloud as dynamic resistance above. WTI crude is rising at an accelerated pace as the US dollar treads water and oil could sweep the 2018 highs in the coming week.

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