FX Reversals Underway

Last week’s sudden drop in the Dollar has proved highly fertile for reversal traders in FX. Across the board we’ve seen USD-counterparts rallying firmly. For technical traders, these moves looked well signalled given the basing action and momentum divergence we’ve seen in pairs such as EURUSD, GBPUSD, AUDUSD and (on the other side) USDJPY, USDCAD etc.

Fed Pivot ?

The sell-off in USD is driven by the view that on the back of October US CPI coming in well below target, the Fed is likely to now adjust its tightening in December. Traders are looking for the Fed to use a much smaller .5% hike, signalling a pivot from the prior string of .75% hikes. Consequently, incoming data and Fed commentary leading up to the December FOMC will be closely watched.

Near-Term Risks

Given the protracted USD bull trend we’ve seen over the last 12 months, there is plenty of room for the USD unwind to continue. If we see any data weakness this week (PPI and retail sales), these will likely act as a fresh catalyst for further downside. Similarly, a slew of Fed speakers this week also hold the potential to shape Dollar action. Yesterday, Fed’s Waller spoke out against the ‘Fed pivot’ perspective arguing that one CPI report would not change the Fed’s strategy. If this line is taken by other Fed members this week, USD might find its feet again. However, if there is any suggestion that the Fed is looking to slow down in December, we can expect USD to drop further.

Technical Views

EURUSD

The breakout above the bear channel is now starting to gather pace on the move north of 1.0088. This was key local structural resistance and with the market now above there, the focus is on a continued push higher, in line with bullish momentum studies signals. With 1.0088 holding as support, 1.0346 is the next level to break, opening the way for a move higher to 1.0775 longer-term.