FX: Why Fake Outs Are More Likely Than Breakouts

By Kathy Lien

Fake outs are more likely than breakouts in the foreign exchange market this week. This is the last week of August and, for many, it is synonymous with the end of summer. With final outings to the beach or the beginning of school on everyone’s minds, this is traditionally a period of consolidation and not continuation. Month-end flows could lead to some intraday volatility tomorrow, but those moves generally do not last.

There’s less at stake with the Federal Reserve’s Jackson Hole Symposium, one of the biggest events of the summer behind us. Last Friday, Chairman Jerome Powell said tapering will begin this year but he stopped short of specific timing, which capped the U.S. dollar’s gains and sent Treasury yields lower. The greenback recovered a bit today, but its gains were modest at best. The Fed will most likely begin reducing asset purchases in September, but the uncertainty that the Delta variant poses for the fall means it could still be a coin toss.

The chance of consolidation in the forex market is even greater, with non-farm payrolls scheduled for release on Friday. Traders will be biding their time until the jobs report because there’s nothing else on the calendar that could alter expectations for Fed policy. But even the jobs report may not pack much punch. If non-farm payroll growth slows as expected, it would reinforce the Fed’s cautiousness. If job growth is strong, it would build the case for taper. But barring an exceptionally weak report, a September signal is still the most likely scenario. The U.S. dollar should remain on its back foot, with consumer confidence due for release. Stocks may have hit record highs, but Delta variant concerns should drive sentiment lower.

The only currency pairs that could potentially breakout are the crosses, particularly in the next 24 hours, with Canada and Australia’s second quarter GDP reports scheduled for release. Canada has been leading the globe in policy adjustments, but tough restrictions were in place at the beginning of the second quarter. Provinces like Ontario, which is now in Step 3 of its reopening, did not move into Step 1 until June 11, and while Quebec began easing restrictions late May, it did not transition into the green zone (its most lenient so far) until late June. So for the better part of the quarter, demand in Canada was limited.

In Australia, new outbreaks were discovered in the second quarter, with Victoria entering a fourth, fifth and now sixth lockdown. On June 25, Sydney went into lockdown, where it remains today. Australia is at risk of a double-dip recession, and we will see a move in that direction in the second quarter, with growth slowing materially. Economists are still looking for positive growth, but if GDP turns negative, AUD could extend its losses quickly.

Eurozone CPI and German labor market numbers are due for release on Tuesday. With German inflation hitting fresh 13-year highs, EUR/USD hit a one-week high. Its gains were modest but could accelerate if CPI and labor market numbers surprise to the upside.