eFXplus DATA

TD Research summarizes its tactical views on EUR/USD and USD/JPY into next week's FOMC meeting.

"Next week's Fed meeting is the appetizer to the mid-term entree in Nov. Still, the break of the 1.1750 level is important for the EUR, suggesting we could see higher lows there moving forward.

A mix of higher global rates and equities is a bad mix for the JPY, though it is decoupling from cyclical drivers that point to 111.40. We fade breaks of 113," TD argues. 

• USD/JPY consolidates 111.66-2.88 post-US-China tariffs Tues rise
• Pre-w/e profit taking seen with July's 113.18 high nearby
• Also have huge 61.8% of 2016-18 drop & 200-WMA resistance @113.27
• U.S.-Japan trade talks & Trump-Abe next week
• US Markit PMI no help, even as Fed rate hikes well priced in
• Prior peaks mid-114.00s & 2016-18 76.4% @115.33 breakout targets
• Another failure near 113.27 would likely test recent c112 bids
• May see less risk-on/JPY-off flows after quarter-end flows
• Lightened BOJ L-T JGB buying up steepens JGB curve, another tweak?
• GBP/JPY slammed on Brexit fears, EUR/JPY stalls pre-April high

USD/JPY's rally is facing a big week ahead as it confronts major chart resistance and a host of event risks that includes a Fed policy decision, U.S.-Japan trade talks and a Trump-Abe summit. Currently, the wind is at the backs of buyers given that the Fed will raise rates next week and probably defend its projected rate rising path to a 3.25 to 3.5 percent peak in 2020 despite trade war concerns and economic impact from Hurricane Florence.
And, Japanese investors have ramped up their buying of foreign bonds.
USD/JPY needs to clear the 61.8 percent retracement of the 2016-18 drop and the 200-WMA at 113.27 to put in play repeated prior peaks in the mid-114.00s.
If next week's U.S.-Japan trade talks end without increased risk of auto tariffs and the FOMC's tightening message instills confidence rather than market fears of rate hikes that spark broad deleveraging flows into the yen, then USD/JPY can clear 113.27 and set its sights on mid-114.00s peaks.
If not, it will test support at 112.

MUFG Research discusses EUR/USD outlook and adopts a bullish bias in the near-term.

"The reversal of US dollar strength has caught the market by surprise. Leveraged funds are still positioned heavily long the US dollar. A break above the 1.18000-level could trigger a liquidation of long US dollar positions and reinforce the current upward momentum for EUR/USD.

The main focus in Europe in the week ahead will be ongoing budget discussions between the Italian populist government. Recent comments from government officials have provided reassurance that the planned fiscal expansion is likely to be more modest than feared in 2019." MUFG notes. 

"However the main market focus in the week ahead will be the Fed’s latest policy meeting. The Fed is expected to raise rates again and signal another hike should be forthcoming in December as well. If the Fed signals more concern over building trade tensions between the US and China it could weigh further on the US dollar. Yet if the Fed continues to concentrate more on building domestic inflation risks, it should provide more support for the US dollar," MUFG adds. 

EUR/USD's rally off August's low is confronting signs of imminent correction after pulling back from the trend high it set earlier today. Disappointing September euro zone PMIs -- even after forecasts were already lowered from August -- helped send EUR/USD into the red.
German Bund yields nose-dived, driving German-U.S. yield spreads to new trend wides, which weighed on EUR/USD.
Renewed weakness in emerging market currencies also hurt, due to EUR/USD's correlation with the EM complex. The price action resulted in a bearish tone in daily techs, with RSI diverging and an inverted hammer forming.
Both of those suggest a short-term correction is due, though monthly techs remain constructive since August's bulls hammer was followed by gains in September and RSI remains biased up.
The conflicting daily and monthly technical signals hints at consolidation.
As long as bulls can hold the line at 1.1510/30 support, upside risks for EUR/USD remain.

CIBC Research discusses the reaction to today's Canada's retail sales and CPI prints .

"Two data releases printing in line with expectations in terms of headlines, and with some mixed messages in terms of the underlying detail. Headline CPI fell 0.1% in August, for an annual rate of 2.8%, both in line with the street's view. A reduction in air transportation costs, which had proved a big positive in the prior month, contributed to the deceleration. However, even with that ex-food/energy CPI rose by a trend-like 0.2% in August, which we had expected to be slightly weaker after an outsized gain in July. Also highlighting slightly higher underlying inflation were the BoC's three new measures, which each accelerated by a tick in August to average 2.1%.

While that's not screaming for rate hikes, it gives the Bank comfort to hike in October even if GDP growth slows a little from Q2's pace.

With the CPI figures a little stronger in the detail than the headline, that could be slightly supportive for the C$ today and see yields rise a little," CIBC argues.

• Profit-taking on longs helps deflate AUD/USD from 0.7304 (three-week high)
• AUD/USD up 1.9 pct this week, largest weekly gain since July 2017
• Ascent to 0.7304 fuelled by rise in risk appetite: SSEC up 2.5 pct today
• Copper hits six-week high as trade worries ease nL3N1W71QK
• S&P raises outlook on Australia, affirms AAA credit rating nL3N1W71QK

Corrects headline and second bullet

• Doji candles Sep 18/19 warned of a EUR/GBP direction change
• GBP/USD, slide under 1.3200 underpinning while EUR/USD idles
• Thursday hammer doji (bullish) strengthened the rebound call
• Early Friday sees price bounce strongly to 0.8923 from 0.8874
• 55DMA and cloud top initial res. points, 0.8932 and 0.8943
• Favour fading cloud with tight stop abv 0.8972 daily Kijun line

• Cable drop to 1.3208 fuelled by no deal Brexit warning from a UK minister
• Grayling: No Brexit deal unless EU softens on Irish border nL9N1VT00W
• 1.3208 = low water-mark for GBP/USD since Thursday's 10-week high of 1.3295
• EUR/GBP up to one-week high of 0.8917 vs nine-week low of 0.8848 Thursday
• May's Brexit plan goes pop after "humiliation" by EU, British media says
• See: nL8N1W7146. Annual Conservative Party conference Sept 30-Oct 3

• Brexit uncertainty may help to keep cable below 1.33 into the weekend
• UK's Grayling: No Brexit deal unless EU softens on Irish border nL9N1VT00W
• Offers just shy of 1.33 capped GBP/USD at a 10-week high of 1.3295 Thursday
• See: . Subsequent pullback based five pips shy of 1.3220
• 1.3220 is 38.2 pct Fibo of 1.3098 (Wednesday's low) to 1.3295
• EUR/GBP up to 0.8888 early Europe. 0.8848 was Thursday's nine-week low

• USD/JPY well bid in Asia, 112.42 early to 112.80, US yields firm, risk on
• Yield on US Treasury 10s @3.081%, back near recent 3.096% high, stocks up
• Stops tripped earlier above 112.62 July 20 high, more 113.00+, 113.20+
• Support eyed on dips towards 112.50, USD590 mln option expiries at strike
• More expiries below at 112.00-01, total USD1.6 bln, more 112-area Monday
• With another Tokyo three-day weekend coming, importers especially on bid

• Cable rallied yesterday and took GBP/JPY up with it, USD/JPY buoyant, helped
• Cross from 147.30 to 149.28, today 149.09-39 so far, better bid
• 149.30 July 16 high topped, moving towards 150.00 peak on May 18
• Decisive break above gradually descending 200-DMA bullish, 148.31 today
• Though no break-through on Brexit talks at Salzburg, hopes for deal in Oct
• Top of weekly Ichi cloud 150.76, 55-WMA 148.45, Japan investor demand again?

EUR/USD: Neutral (since 21 Aug 18, 1.1485): Further EUR strength to 1.1850 seems likely.

We have held the same view since last Friday (see update on 14 Sep, spot at 1.1690) wherein the “probability for a move to 1.1790 has increased”. EUR subsequently traded sideways for several days and our resolve was tested as we indicated yesterday (20 Sep, spot at 1.1680) that the “prospect for further EUR strength has diminished”. Just when we thought time was running out for our view to work out, EUR rocketed and blast past the strong 1.1725/35 resistance zone and hit a high of 1.1785 (holding just a few pips below 1.1790). The outsized rally (the +0.88% up-move yesterday was the largest 1-day gain in 3 months) coupled with the break of strong resistance levels indicates scope for further EUR strength towards the next resistance at 1.1850 (June’s peak). All in, we expect EUR to trade on a firm footing from here and only a break of 1.1690 (‘key support’ previously at 1.1640) would indicate that the current EUR strength has run its course.

GBP/USD: Neutral (since 21 Aug 18, spot at 1.2795): Scope for further GBP strength to 1.3365.

We have held a ‘positive’ GBP view since last Tuesday (11 Sep, spot at 1.3025) wherein we indicated the “corrective rebound could extend to 1.3170”. We added on Tuesday (18 Sep, spot at 1.3150) that despite being overbought, the advance has scope to extend towards 1.3215. When GBP dropped sharply from an exact high of 1.3215, we indicated yesterday (20 Sep, spot at 1.3140) that “the risk of a short-term top has increased”. Despite our reservation, GBP punched above 1.3215 and hit an overnight high of 1.3295. The sharp and impulsive rally suggests there is scope for further GBP strength to the July’s peak of 1.3363. That said, as the rally is in overbought territory now, GBP has to continue to move higher in the next few days as a prolonged consolidation would quickly increase the risk of a short-term top. All in, we will continue to hold a ‘positive’ GBP view as long as the ‘key support’ at 1.3170 is intact (level previously at 1.3060).

AUD/USD: Neutral (since 13 Sep 18, spot at 0.7170): Risk of a stronger recovery has increased.

We indicated yesterday (20 Sep, spot at 0.7260) that the “risk of a stronger recovery has increased” and “a break above 0.7280 would suggest the recovery could extend higher to 0.7360”. AUD subsequently cracked the 0.7280 resistance as it hit an overnight high of 0.7293. In other words, the focus now is for the current recovery in AUD to extend to 0.7360. Only a break of the ‘key support’ at 0.7220 would indicate that a short-term top is in place.

NZD/USD: Neutral (since 20 Aug 18, 0.6625): Further NZD strength to 0.6730 would not be surprising.

We indicated yesterday (20 Sep, spot at 0.6635) that a daily closing above 0.6655 would suggest NZD could continue to head higher to 0.6705. NZD cracked 0.6655 without much difficulty and ended the day on a solid note (NY close of 0.6686, +1.10%). From here, 0.6705 appears to be within reach and we see room for further NZD strength to 0.6730. All in, there is no indication that the current positive tone in NZD is about to end and only a break of 0.6620 (‘key support’ previously at 0.6575) would suggest that a short-term top is in place.

USD/JPY: Neutral (since 23 Jul 18, 111.20): Upward momentum has improved, risk is still clearly on the upside.

We highlighted on Wednesday (19 Sep, spot at 112.30) that “upward momentum has improved” and “risk is still clearly on the upside”. We added, “a move above 112.60 would not be surprising but there is another strong resistance level at 112.80 and this level may not yield so easily”. USD came close to 112.60 as it hit an overnight high of 112.58. Despite the generally positive price action, we continue to see solid resistance at 112.80 and while an intraday move above this level would not be surprising, we doubt USD can maintain a toehold above this level. Note that there is another very strong resistance at 113.15 (July’s peak). All in, the current positive outlook for USD is deemed as intact until the ‘key support’ at 111.75 is taken out (level previously at 111.55).

USD/JPY is holding up very well despite broad USD weakness and a number of factors suggest it may remain buoyant.
First, the BOJ left policy unchanged on Wednesday.
While this was widely expected, some held the view that Governor Kuroda would be slightly more hawkish after the July tweak.
This was not the case, with Kuroda emphasizing the need to keep policy accommodative nL3N1W51VF to achieve the still elusive 2 percent inflation target .
Second, PM Abe won the ruling LDP's leadership race yesterday but with less of a majority than he had hoped for nL3N1W606T.
The vote was 553-254, with many rank and file LDP members voting for rival Shigeru Ishiba.
Again not a reason to buy JPY.
Third, risk appetite remain high, with global stock markets rallying and the Nikkei close to a test of 24,000.
With U.S. yields up too, Japanese investors are actively seeking U.S. Treasuries and selective corporate bonds.
The icing on the cake may be flagging Japanese exporter offers.
This bloc is likely done for the current fiscal half-year ending this month, and seem more cautious on the second half of the year given the lack of USD/JPY downside.
Earlier comment .

• EUR/JPY soared yesterday, 130.93 to 132.52 EBS, Asia so far 132.44-57
• Cross highest since 133.25 on April 26, trend high then 133.48 April 24
• Towards test of 133.23 top of weekly Ichi cloud? 133.00 resistance ahead
• USD/JPY buoyancy and EUR/USD rally overnight behind move
• Any Japanese shorts still out there forced to cover, some going long
• Dip buying now seen way to go, support-bids from ahead of 132.00 now

• EUR/USD opens 1.1% higher in Asia on resurgent global risk appetite
• Stocks rally, rising DE yields, tightening Italy-DE bond spreads fuel gains
• USD vulnerable on inability to rally this week despite favourable factors
• Negative Italy news brushed aside long USD positions unwound nL8N1W65H4
• Strong resistance @ 1.1780, 38.2% of 2018 euro decline under threat
• Through 1.1800 opens 1.1853 June high; support now at 1.1740-50

• GBP/USD rallies 1% Thurs on strong retail sales and broad USD weakness
• Rally comes despite higher US yields and Brexit uncertainty nL8N1W61GS
• GBP/USD pulls away from 100 DMA with all studies heading north, strong trend
• Next target the July 9 high at 1.3363, ultimate target 200 DMA at 1.3520
• Supports at 100 DMA at 1.3159, Thurs low at 1.3135 and 10 DMA at 1.3127
• Risk-on mood pushing USD broadly lower, all eyes on Asian ccys & stocks Fri

Danske Research discusses EUR/GBP outlook and advises  its corporate clients should take advantage of the recent decline in EUR/GBP and high implied volatility.

"The informal EU Summit continues today and we expect EUR/GBP to remain volatile and sensitive to Brexit news. We generally see risks skewed to the upside for EUR/GBP in coming weeks ahead of the annual conservative party congress, which starts on 30 September.

Hence, corporate clients should take advantage of the recent decline in EUR/GBP and high implied volatility when hedging GBP income. See Corporate Hedger - use GPB recovery and high volatility to hedge GBP income, 14 September," Danske argues. 

• USD/JPY makes base by 112 and sprints toward 113.18 July high
• Global risk rebound taking bigger toll on JPY haven longs
• Probing Aug-Sept rising channel top at 112.58
• Looks set to close above 112.38, 76.4% of the July-Aug drop
• Key resistance is 113.27, 61.8% of the 2016-18 drop & 200-WMA
• Japan CPI tonight, but BOJ immobile & FOMC to hike next week
• AUD/JPY and EUR/JPY clear big hurdles, latter best since April

USD/JPY is shaking off broader dollar weakness to take another run toward long-term resistance just beyond July's 113.18 high, but it still faces big hurdles just beyond that. Bids by big 112 expiries have provided short-term support. The spike into the London close and after the NY options cut is probing a rising channel top at 112.57.
A close above the 76.4 percent retracement of the July-August drop at 112.38 and channel clearance put July's 113.18 high in play.
Reasonably robust U.S. econ data, such as the Philly Fed nZON02EC00 and weekly claims, buttress Fed tightening expectations, but it's the global rerisking flows this week that are causing a broader weakening of the yen.
Over the last week, rising ADX and Bolli spreads have begun to affirm USD/JPY's uptrend.
The bigger issue for bulls, a sizeable cohort if IMM positioning is any indication, is that the 61.8 percent of the 2016-18 drop and the 200-WMA offer major resistance at 113.27, so the risk-reward for longs only looks good if 113.27, and prior key peaks in the 113-114.00s, can be cleared.