USD, USD/CNH, USD/JPY Talking Points:

A Busy Start to the Week

It’s been a busy start to this fresh week and there’s a number of themes in the spotlight. This week’s open happened with a bang as the PBoC aggressively weakened the Yuan with USD/CNH crossing the vaulted 7.0000 figure on the chart. This appears to be a response to President Trump’s announcement of additional tariffs from last week and can carry some fairly wide-ranging consequences. Initially, it does help Chinese exporters as goods are now cheaper overseas. But, it further widens the US-China trade deficit which is very much in the spotlight around trade war talks, and it also highlights a sense of worry at the PBoC as the Chinese economy continues slowing down amidst a flurry of risks.

USD/CNH Daily Price Chart

Chart prepared by James Stanley; USDCNH on Tradingview

This move has already caught the attention of President Trump with the Monday morning tweet directed towards currency manipulation from China. Suffice it to say, this probably isn’t the last we’ve heard of this theme for the week.

President Trump Tweet on Chinese Yuan Drop

Source: President Trump’s Twitter Feed

Gold Glitters as Risk Potential Flares

Going along with that rather aggressive move in the Yuan, risk markets remain a focal point. Gold prices have broken out to a fresh six-year-high, crossing above the 1450 level that was evasive last week. I had looked into Gold as part of this week’s Technical Forecasts, retaining a bullish bias after last week’s bearish turn was aggressively reversed on President Trump’s initial announcement of additional tariffs.

With the ‘race to the bottom’ seemingly set to continue, with few Central Banks open to tighter policies that might bring on stronger currencies; and the backdrop around Gold could continue to shine, particularly as risk aversion themes remain center-stage, such as we saw around China this weekend.

Gold Daily Price Chart

Chart prepared by James Stanley; Gold on Tradingview

US Dollar Continues to Unfold After Last Week’s Rate Cut Rally

The US Dollar was really strong for about a day after that FOMC rate cut last week. While the FOMC did soften the backdrop for the first time in a decade, they were also rather evasive on the topic of future policy. Markets had previously wound up for more rate cuts in the remainder of this year, but the Fed was non-committal; so after that 25 basis point cut, the US Dollar rallied up to a fresh two-year-high.

But, during the press conference that accompanied that rate cut, FOMC Chair Jerome Powell denoted how continued pressures internationally were a point-of-worry for the bank; heavily implying that continued trade tiffs were a risk on the horizon that the bank was keeping tabs of. Less than 24 hours later, President Trump announced those new tariffs, and US Dollar strength went away and, at this point, the USD is below any levels that were traded last week.

Perhaps more to the point, the backdrop for a bigger-picture reversal is there: Last week’s price action in USD produced an inverted hammer formation, which when found atop a trend, may prelude a bearish reversal. So far this week price action has continued to tip-lower, helping to fill in a potential evening start pattern should this week’s trade see the US Dollar trade below 97.53, which is the half-way point of the bullish move two weeks ago. A weekly close below this price would mark completion of this reversal formation.

US Dollar Weekly Price Chart

Chart prepared by James Stanley; DXY on Tradingview

Yen Strength Remains on the Move

Last week also produced a Bank of Japan rate decision although this was met with far less fanfare. Yen strength came back as an attractive theme around last week’s announcement of increased tariffs; and that theme has continued to run into the new week. Prices in USD/JPY are currently trading at fresh seven-month-lows, pressing towards the early-year spike that takes place around the 105.00 handle.

As discussed in last Thursday’s webinar, USD/JPY price action had already started to show a bearish engulfing bar, which will often be approached with aims of directional continuation. For traders looking at a continuation of risk aversion themes, Yen strength could remain in focus, particularly against currencies such as the British Pound, Australian or New Zealand Dollars or, perhaps even, against the Euro.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; USDJPY on Tradingview

Stocks Tank – How Will the Fed Respond?

While stocks remain very near fresh-all-time highs that were just set a couple of weeks ago, driven by the prospect of a dovish flip at the Fed; this morning brings a different picture into the mix.

Stocks sold off around the FOMC rate decision last week, even with the bank softening the backdrop for corporates. Support came into play around the prior high at the 2960 area, and this led to a quick bounce that held into Thursday trade.

But, it was around that tariff announcement that US equity prices began to face pressure and that lasted through Friday trade as the S&P 500 pushed down to fresh monthly lows. The surprise move by the PBoC to open this week hasn’t helped matters as risk aversion continues to run, and S&P 500 futures have already reacted by continuing to drop down to fresh lower-lows.

Historically speaking, this is around the time we normally start to hear from various FOMC members about how the bank can operate in the remainder of this year. Fed-speak has been a primary bullish driver for a number of these equity themes and given the backdrop and the recent reaction through markets to last week’s rate cut and tariff announcement, and we’re likely not far away from seeing this again. Until then, focus is on support potential in the S&P 500 and the index is already closing in on some interesting levels on the chart. The area around 2880 is interesting, as this is the 50% marker of the June-July bullish move. Below that is a potential support zone that runs from 2835-2843.

S&P 500 Four-Hour Price Chart

Chart prepared by James Stanley; SPX500 on Tradingview

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX