FX Trading focus: Traders afraid to take a stand on the US dollar
Yesterday saw GBPUSD pushing to new highs for the year, with the move starting at an odd time of day in Asian hours, in the middle of the night for London traders who were finishing up a three-day holiday weekend, as were New York traders. By mid-morning in Europe, the move was entirely unwound, suggesting that there was not conviction behind it and that it may have been a run on weak shorts with stops above the range. The pump and dump resembled moves in other USD pairs we have seen of late, where sustained direction is impossible to come by and suggests that traders are reluctant to take a stand on USD direction until perhaps having a look at this Friday’s jobs report, together with the June 16 FOMC meeting and whether the recent taper talk shapes up into something with a bit more urgency than merely an agreement to begin discussing it some point. Yesterday, the Fed’s Brainard, normally quite resolutely dovish, tried to maintain the difficult stance of two-way credibility on what the Fed may eventually do, noting that the US economy is far from the Fed’s goals while acknowledging two-way risks.
In the May ISM Manufacturing data yesterday, while the headline and other key numbers were very strong, it was rather interesting that the employment sub-index dropped to 50.9 vs. nearly 55 expected and versus above 55 in April. The manufacturing sector in the US is small and the ISM services survey out tomorrow is more important for employment indications as this is the dominant part of the US economy and where the “opening up” effect will be strongest from the end of Covid restrictions, the last of which should be fading in the holdout areas this month.
The GBPUSD breakout higher oddly showed up in Asian hours after a UK and US holiday and reversed sharply back lower. Pattern traders might be quick to jump on such a well-defined reversal as a sign that more selling pressure lies ahead, but the poor “quality of the initial” rally more likely means that the information value of the price action is virtually nil. Rather, any more significant downside pressure would seem more likely to come from, for example, a far stronger than expected US May jobs report and fears that the June 16 FOMC meeting will bring a firmer commitment to investigate tapering rather sooner than later. For now, the technically pivotal area to the downside is 1.400 as the price action since March has made clear.