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Weekly Forex Trading Forecast

Written by , Quantitative Strategist ; , Currency Strategist ; , Currency Strategist ; , Currency Analyst  and , Currency Strategist
Symbol Forecast Outlook

Greek Negotiations Take Sharp Turn for Worse, US Dollar set to Rally

Greek Negotiations Take Sharp Turn for Worse, US Dollar set to Rally

Greek Negotiations Take Sharp Turn for Worse, US Dollar set to Rally

Fundamental Forecast for Dollar: Bullish

- US Dollar bounces off of key technical support, eyes potentially critical week ahead

- Late developments in Greek debt negotiations virtually guarantee a volatile Sunday market open

- Follow news as it happens via the DailyFX Real Time News feed

The US Dollar heads into the third quarter with momentum in its favor as it finished the week notably higher versus all G10 counterparts. Whether or not the USD can continue its recent streak will almost certainly depend on the outcome of ongoing Greek negotiations and highly-anticipated US labor market data.

It was shaping up to be a relatively quiet week for the US currency and global financial markets given limited economic event risk, but a sharp Dollar rally against key technical support levels pushed it higher versus the Euro for the first week in four. A good week for US economic data helped further fuel the early-week rally, but the most decisive moves may come in the days ahead given the key Greek deadline and the US Nonfarm Payrolls report. FX volatility prices have picked up after hitting multi-month lows; what might we expect?

All eyes turn to Greece and ongoing negotiations with the Euro Working Group as both sides negotiate ahead of the key June 30 deadline, and the most recent announcement from Greek Prime Minister Tsipras effectively guarantees Greece will miss a key payment due to the International Monetary Fund.

Tsipras said he would ask for a short extension of Greece’s bailout program with its creditors—due to expire on June 30—in order to hold the referendum on creditors’ most recent proposal on July 5. This virtual bombshell promises important Euro volatility at Sunday’s weekly open, and the safe-haven US Dollar is in a position to do well amidst heightened uncertainty.

The planned referendum on July 5 also essentially guarantees that Greece will miss a payment due to the International Monetary Fund due on June 30. This in itself doesn’t mean that the government is in technical default; the IMF allows its borrowers a 30-day grace period before it formally notifies its executive board of the late payment. Yet it’s easy to see why the missed payment severely raises the risks of an eventual default and could quite easily bring a substantial run on Greek banks.

The European Central Bank has thus far stepped up its Emergency Lending Assistance to Greek banks as investors move their funds at a steady pace, but ECB President Mario Draghi said that ELA funds were contingent on Greece remaining within its existing bailout agreement with creditors. If the ECB pulls ELA funding the Greek government will have no choice but to impose capital controls on its banks—patently incompatible with the rules of the European Monetary Union and the Euro. Expect financial market volatility.

Once markets get past the initial shock of the new Greek news, attention will turn to a frequently market-moving US Nonfarm Payrolls Report due Thursday. Any major suprises could easily force a repricing of US Federal Reserve interest rate expectations and force the Dollar to react in kind. It is shaping up to be a volatile week for the Euro, Dollar, and broader financial markets. - DR

Euro Set for Rocky Week as Greece Stares into the Abyss

Euro Set for Rocky Week as Greece Stares into the Abyss

Fundamental Forecast for Euro: Neutral

- The Greek debt negotiations only recently started to impact charts, and not in a good way for the Euro.

- FX markets honed in on the seriousness of the Greek negotiations by Friday, leaving the Euro weaker.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

It was a rough week for the Euro, and it doesn’t look like it’s about to get any easier. EURUSD declined by -1.66% to close the week at $1.1189, while EURJPY slipped by -0.72% to ¥138.31; the majority of the declines developed mid-week when it became clear that Greek negotiators and their creditor counterparts would be unable to reach an accord over short-term financing (to help Greek meet its June 30 obligation to the IMF), and after a breakdown in negotiations at the very last moment on Friday, it now seems the Euro is guaranteed a rough few days this week.

Negotiations may be ongoing, but: Greece has effectively said it won't pay the IMF on June 30; the ECB has said it won't raise the ELA facility at present, putting the Greek banking system on the brink of a liquidity crisis, forcing officials to institute capital controls and keep banks closed on Monday; and Greek officials are putting the country to a referendum vote over the Eurogroup's aid proposal, in which the government will campaign against it in a lead up to a July 5 vote. The Euro is rightly upset.

The IMF’s statement today was riddled with disappointment, as it’s clear that the Greek government is digging in to its pre-election promises (which may be good for political accountability domestically, but the position is at odds with what the Eurogroup is offering, so it’s unworkable situation). The chance of an agreement ahead of the referendum vote seems slim at this point, leaving the Euro exposed to greater volatility as markets hone in on next Sunday.

As we made note of on Friday, but is absolutely worth reiterating now, is the notion of risk management with respect to the EUR-crosses. It may be deemed best risk management practice for traders to reduce position size and leverage in EUR-crosses for the foreseeable future. While the potential outcome for Greece is unknown - the absolute magnitude of the fallout around a positive or negative outcome will be enough to have a significant impact on prices over the coming week at a minimum.

Similarly, it is important to give respect to the Swiss National Bank here, as the Swiss Franc could easily regain its appeal as a regional safe haven currency if the Greek saga continues to take turns for the worse. In recent days and weeks, SNB policymakers have commented on how the Swiss Franc is overvalued. Logically, the SNB may be more aggressive in an effort to weaken the Swiss Franc sooner rather than later in order to stem a wave of capital seeking safety in the Swissie, before speculative flows accelerate beyond containment. After the SNB’s decision to remove the EURCHF peg in January, it’s clear the SNB will do whatever it deems best for Switzerland irrespective of the outcome on markets; and traders may just want to steer clear of CHF-crosses altogether.

The Greek debt saga’s impact is not limited to the Euro or the Swiss Franc; the Japanese Yen may immediately switch into a ‘risk-on, risk-off’ safe haven currency once more, leaving USDJPY on uncertain terms even if EURUSD declines. Speaking from a technical perspective, EUR-crosses have started to fail at significant support levels (former resistance) after breakouts, while EURUSD has experienced the failure of two triangles pointing to prices at $1.1050 or lower – which is materializing in the pre-market thus far (just before 17:00 EDT/21:00 GMT on Sunday, EURUSD was trading near $1.1000). Traders could be ready to torment the Euro if the Greek saga continues down its current path, as there were still only 99.3K net-short contracts in the futures market for the week ended June 23, well-off the all-time high of 226.6K set the week ended March 31. A swell in short positioning once more could easily push EURUSD towards $1.0800 as the year reaches its midpoint. –CV

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Japanese Yen Unlikely to Break Out Until Greece Moves

Japanese Yen Unlikely to Break Out Until Greece Moves

Japanese Yen Unlikely to Break Out Until Greece Moves

Fundamental Forecast for Yen: Neutral

The Japanese Yen finished the week modestly higher versus the recently-downtrodden US Dollar, but the lack of a clear breakthrough from a highly-anticipated US Federal Reserve meeting and a lackluster Bank of Japan decision give few clues on next steps for the USD/JPY.

All eyes were on the US Federal Open Market Committee (FOMC) as investors looked to Fed guidance on its next interest rate moves, and relatively dovish official rhetoric and forecasts sparked a modest US Dollar sell-off across the board. Officials stopped short of giving clear indication on whether the FOMC would raise interest rates at its much-anticipated September meeting, however; the ambiguity gives relatively little reason to expect the US Dollar will continue sharply lower through the foreseeable future.

A mostly uneventful policy meeting from the Bank of Japan likewise gives little reason to believe that the USD/JPY will see major moves through the foreseeable future. The BoJ did announce it would improve the way in which it communicates policy decisions and economic forecasts in the future. At this stage there is little reason to believe the changes will have a meaningful impact on the Japanese Yen through the near-term.

A noteworthy drop in FX volatility prices suggests that the USD/JPY may continue to trade within its recent ¥122.50-124.50 range. The most important caveat is that a continued lack of progress in ongoing negotiations between Greece and its creditors raises the risks of significant market volatility. If Greece is unable to seek funding ahead of a key June 30 deadline it may in effect be forced out of the Euro Zone—an event that would likely send significant shockwaves through broader financial markets.

In times of market turmoil we have most often seen the Japanese Yen outperform its major counterparts, and we believe that similar episodes in the future would push the JPY higher across the board (USDJPY lower). Barring such an outcome, however, we see little reason to believe that the US Dollar will break substantially in either direction versus the recently slow-moving Japanese Yen. - DR

Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

Stronger UK Recovery to Fuel Bullish GBP Outlook- BoE Hike in August?

Fundamental Forecast for British Pound:Neutral

The fundamental developments coming out of the U.K. economy may spark another near-term rally in GBP/USD should the data prints boost expectations of seeing a Bank of England (BoC) rate hike in 2015.

A further expansion in U.K. Mortgage Applications paired with a meaningful upward revision in the final 1Q Gross Domestic Product (GDP) report may heighten expectations for a stronger recovery, and we may see a growing number of BoE officials adopt a more hawkish tone for monetary policy as the region gets on a more sustainable path. The fading margin of slack in the real economy may encourage a larger dissent within the Monetary Policy Committee (MPC) as board member Martin Weale sees scope to raise the benchmark interest rate as early as August, and Governor Mark Carney may prepare U.K. household and business for an imminent rise in borrowing-costs as the central bank head anticipates stronger growth and inflation in materialize in the second-half of the year.

At the same time, the BoE outlook remains at odds with the Federal Reserve as Janet Yellen and Co. remains on course to normalize monetary policy later this year, and market participants may increase bets for a September liftoff as the U.S. Non-Farm Payrolls (NFP) report is expected to show another 230K expansion in job growth. However, with Average Hourly Earnings projected to hold at an annualized 2.3% in June, subdued wages may become a growing concern for the Federal Open Market Committee (FOMC) as it undermines the central bank’s scope to achieve the 2% target for inflation. With the central banks in the U.S. & U.K. standing ready to shift gears, the outlook for GBP/USD largely hinges on the key data prints coming of both regions are likely to play an increased role in driving near-term volatility in the exchange rate amid the narrow race to remove monetary support.

With that said, the pound-dollar may face range-bound prices going into July, and signs of a stronger U.K. recovery may heighten the appeal of the sterling, while another series of mixed U.S. data prints may continue to drag on Fed expectations especially as the central bank curbs its economic projections for 2015. - DS

Gold Preserves June Range- Watch Greece, U.S. NFP Report for Cues

Gold Preserves June Range- Watch Greece, U.S. NFP Report for Cues

Gold Preserves June Range- Watch Greece, U.S. NFP Report for Cues

Fundamental Forecast for Gold: Neutral

Gold prices plummeted this week with the precious metal down 2.2% to trade at 1174 ahead of the New York close on Friday. The losses amounted to a 5 day losing streak with prices breaking back below the 2015 open early in the week. Bullion is down just 1% on the year as lackluster price action drags on volatility expectation with a stronger dollar, improving US data and expectations for higher rates from the Federal Reserve continuing to sap demand for the yellow metal.

Looking ahead to the shortened holiday week, the June U.S. Nonfarm payroll release on Thursday will be central focus with consensus estimates calling for a print of 230K as unemployment ticks lower to 5.4%. Aside from the headline figure, market participants will be closely eyeing the wage inflation figures as subdued price growth remains a growing concern among Fed officials. Look for strong data to continue to weigh on gold prices as interest rate expectations are adjusted. In addition, European headlines & key PMI data out of China next week may also impact prices amid the ongoing concern surround the outlook for the global economy.

The lackluster price action has been the symbol of indecision for the markets with the ongoing turmoil in Europe surrounding the Greek crisis offering little upside for gold. From a technical standpoint, prices have held within the initial monthly opening range with gold rebounding off basic trendline support extending off the 2015 low on Friday. Note that momentum has been coiling up since the start of the year and we’ll look for a breakout in both momentum and price from the recent range for further guidance on our medium-term directional bias. Although the broader bearish outlook is back in focus, we’ll take a neutral stance heading into next week / July trade with a break below this month’s range targeting critical support down into 1150/51.

Swiss Franc Opportunities Seen Beyond Breakneck Volatility

Swiss Franc Opportunities Seen Beyond Breakneck Volatility

Fundamental Forecast for Swiss Franc: Neutral

  • SNB Shocker Fuels Highest Swiss Franc Volatility vs. Euro Since 1975
  • Sharp Counter-Swing Seen Ahead if ECB Delays Launching QE Effort
  • Buying US Dollar vs. Franc Attractive After Post-SNB Turmoil Settles

The most adept of wordsmiths might be forgiven for struggling to find an adjective strong enough to describe last week’s Swiss Franc price action. A quantitative description is perhaps most apt: realized weekly EURCHF volatility jumped to the highest level since at least 1975, swelling to nearly 2.5 times its previous peak.

The surge was triggered after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” Appropriately enough, the previous historical peak in weekly EURCHF activity occurred in September 2011 when the Franc cap appeared as suddenly as it vanished. Then too, the SNB acted without warning and sent markets scrambling.

The announcement caught the collective FX space by surprise. Even the world’s top international economic bodies were apparently left in the dark. IMF Managing Director Christine Lagarde quipped that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move.Talking about it would be good, she added.St. Louis Fed President Jim Bullard hinted the US central bank was not notified either.

The go-to explanation for the SNB’s actions centers around bets that the ECB will unveil a “sovereign QE” program following its policy meeting on January 22. Mario Draghi and company finally secured a green light for large-scale purchases of government debt after the ECJ gave clearance to the similar OMT scheme devised (but never used) to battle the debt crisis in 2012. The SNB presumably scrapped the Franc cap to avoid having to keep pace with the ECB’s efforts.

Another wave of Franc volatility may be ahead next week. While markets seem all the more convinced that an ECB QE announcement is in the cards after the SNB’s about-face maneuver, a delay in the program’s implementation (if not its formulation) is entirely plausible. Securing the acquiescence of anti-QE advocates like Germany to having such an effort in the arsenal is not the same as launching it. The ECB may yet opt to wait through the end of the first quarter as it has hinted previously before pulling the trigger, sending the Euro sharply higher.

Measuring the fallout from the SNB’s actions is likely to be protracted. The full breadth of the various ripple effects will probably emerge over weeks and months, not hours and days. The Franc now looks gravely overvalued against currencies whose central banks are set to tighten policy this year, with the US Dollar standing out as particularly notable. It seems prudent to let the dust settle before taking advantage of such opportunities however.

Australian Dollar Looks to Greece News, US Jobs Data for Direction

Australian Dollar Looks to Greece News, US Jobs Data for Direction

Australian Dollar Looks to Greece News, US Jobs Data for Direction

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar Looking to Risk Appetite Trends for Direction Cues
  • Greek Debt Negotiation Outcome, US Jobs Report to Guide Sentiment
  • Find Key Inflection Points for the Australian Dollar with DailyFX SSI

Another relatively quiet week on the domestic data front is likely to see the Australian Dollar looking to external forces for direction cues. Two themes continue to dominate the macro landscape: the ongoing negotiations between Greece and its EU/IMF/ECB creditors as well as speculation about the likely timeline for the first post-QE Fed interest rate hike. Developments on either front may trigger volatility in sentiment trends that stir activity in the risk-geared currency.

On the Greek front, the tone will be set by the outcome of another emergency Eurogroup meeting over the weekend. Failure to overcome the impasse may lead to default and push Greece out of the Eurozone, triggering as-yet unknown consequences. Signs of progress before June’s €1.6 billion IMF repayment comes due and the bailout program expires mid-week may boost sentiment as uncertainty risk unwinds, sending the Aussie higher. A breakdown without further room to maneuver stands to yield the opposite result.

Turning to the US, traders interpreted June’s FOMC announcement as broadly dovish. The main takeaway seemed to be that officials’ projected rate hike path over the coming years has flattened compared with their March assessment. A critical caveat seemed to pass below the radar however: Chair Janet Yellen and company continued to call for two rate hikes in 2015.

This narrative is remarkably similar to that of 2014. Then too, investors expected the FOMC to delay or slow the pace of “tapering” QE asset purchases following a disappointing start to the year. The central bank maintained that the slowdown was transitory and delivered the end of QE on schedule however. Policymakers’ response to this year’s hiccup has been nearly identical. This makes it plausible that the Fed will start to hike rates as was intended prior to the first-quarter misstep, mirroring 2014.

Early-2015 Fed commentary hinted at tightening around mid-year. This means that if the parallel with 2014 holds, a hike may come at the July FOMC meeting. The Fed’s call for both a gradual approach as well as two rate increases makes this seem yet more likely. With only four meetings left this year, the central bank would need to begin normalization in July if it hopes to space things out and hike again in October. That stands in stark contrast with a priced-in outlook seeing a single rate increase late in the fourth quarter.

The week ahead will bring ample news-flow that may begin to bridge this gap. US home sales, consumer confidence and manufacturing activity data will lead the way into the much-anticipated Employment report. Economists’ forecasts call for a 227,000 nonfarm payrolls gain in June to mark a slight slowdown from the 280,000 increase recorded in the prior month. US news-flow has been improving relative to expectations since mid-May however, opening the door for an upside surprise. That may trigger a forward shift in Fed rate hike bets, triggering risk aversion and weighing on the Aussie.

New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction

New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction

Fundamental Forecast for the New Zealand Dollar: Neutral

  • New Zealand Dollar May Fall if Weak 4Q GDP Fuels RBNZ Rate Cut Bets
  • FOMC Meeting Outcome to Influence NZ Dollar via Risk Sentiment Trends
  • Identify Key Turning Points for the New Zealand Dollar with DailyFX SSI

The New Zealand Dollar managed to find support against its US counterpart after the RBNZ signaled it was in no hurry to cut interest rates at its monetary policy meeting. Governor Graeme Wheeler highlighted a range of factors underpinning strong economic growth and dismissed soft inflation readings in the near term as largely reflective of the transitory impact of oil prices. Speaking directly to the benchmark lending rate, Wheeler projected “a period of stability” ahead.

Still, the familiar refrainwarning that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data” was repeated. This makes for a news-sensitive environment going forward as markets attempt to divine the central bank’s likely trajectory alongside policymakers themselves. With that in mind, all eyes will be on the fourth-quarter GDP data set in the week ahead.

Output is expected to increase by 0.8 percent, an outcome in line with the trend average. On balance, that means a print in line with expectations is unlikely to drive a meaningful re-pricing of policy bets and thereby have little impact on the Kiwi. New Zealand economic data outcomes have increasingly underperformed relative to consensus forecast since January however. That suggests analysts are over-estimating the economy’s momentum, opening the door for a downside surprise. In this scenario, building interest rate hike speculation may push the currency downward.

The external landscape is likewise a factor. A significant correlation between NZDUSD and the S&P 500 (0.52 on 20-day percent change studies) hints the currency is sensitive to broad-based sentiment trends. That will come into play as the Federal Reserve delivers the outcome of the FOMC policy meeting, this time accompanying the statement with an updated set of economic forecasts and a press conference from Chair Janet Yellen. Fed tightening fears have proven to be a potent catalyst for risk aversion since the beginning of the month. That means a hawkish tone is likely to sink the Kiwi, while a dovish one may offer the currency a lift.