The US dollar has been strong for some time, and it should continue to be so. 

The US dollar broke higher on Tuesday to test the top of a major channel. At this point, crude oil markets are also starting to fall apart, so that does have a massive effect on the CAD. With this, and the fact that the US dollar is relatively strong anyway, the move does make quite a bit of sense. Ultimately, I think this is a market that will continue to see a lot of noisy behavior, but whether or not it respects the channel is a completely different question.

Looking at this chart, it is probably worth noting that the most recent low tested the 50-Day EMA, but then the market turned around to show signs of life again. The huge candlestick for the trading session on Tuesday suggests that there is significant buying pressure, and I like the idea of a potential breakout above the 1.31 handle. If we do break above there, then the market is likely to go much higher. This is a market that has a well-defined channel that we need to pay close attention to. The overall attitude of the market is bullish, so you need to understand that you should be favoring the upside anyway, although the Canadian dollar has been a fighter.

If we were to turn around and break down below the 50-day EMA, it’s possible that the Loonie could look to the 200-day EMA near the one .27 level, and then possibly down to the 1.26 level after that. That is essentially the bottom of the channel, so if we were to break below there, then it’s likely that we fall apart completely.

This is a market that I think is starting to price in the idea of oil struggling, especially as there has been a major concern out there when it comes to the idea of global demand, something that should not be very positive for this market as it looks like people are struggling. That should continue to weigh upon oil, so we will have to wait and see either way. The US dollar has been strong for some time, and it should continue to be so. However, if there’s one currency that can give it a huge fight it will be the Canadian dollar due to the fact that there is so much cross-border transacting between the two.

The USD/JPY has broken higher again in early trading as the week has begun, and speculators need to prepare for wicked volatility.

As of this writing, the USD/JPY is trading above the 123.000 juncture after producing another surge higher. The move upwards this morning may have been fueled by word the Bank of Japan is going to start purchasing Japanese government bonds in an apparent effort to calm the USD/JPY. In the short term however, the news has seemingly spurred on additional pandemonium for the Japanese yen as it has crashed to new long term lows against the USD.

Speculators will need to be extremely careful.  The USD/JPY can move quickly on most days, but the near term appears set to create a high level of nervous trading for the Forex pair. The USD has been strong in Forex. Typically, the Japanese yen has served as a safe haven currency in times of global discontent, but the USD/JPY was trading below the 103.000 level on the 1^st of December 2021, and has experienced a freight train upwards since this date. Fundamentally, this move is not only about the war in the Ukraine, nor only the moves from the U.S Federal Reserve. Something else is stirring the pot.

The heights of the USD/JPY are now traversing values it has not seen since November of 2015. Traders who are trying to figure out how high the Forex pair can climb with technical charts may find the task rather adventurous, particularly if they intend on continuing to speculate on more momentum upwards.  

The old saying of ‘follow the trend’ is often correct, but traders need to be aware when this express elevator chooses to stop, the ride downwards could become swift and very painful if a fall is violent. Conservative leverage and adequate stop losses are essential for the USD/JPY under the present dangerous conditions.

If the USD/JPY sustains its price above the 123.000 mark, traders may want to aim for the 123.250 and 123.500 levels next.  For traders just entering the USD/JPY circus, strict price orders should be used to begin trading the Forex pair, otherwise it is likely the fill will not meet expectations if another sudden burst of volatility unfolds.

How high can the USD/JPY go? During the calendar year of 2015 the USD/JPY did hit the 125.000 levels. These may seem ultra-high and these values may never be seen during this current trajectory, but it should point out that another leg up is not entirely out of the question.

USD/JPY Short-Term Outlook

Current Resistance: 123.590

Current Support: 122.530

High Target: 124.560

Low Target: 121.350

New COVID-19 strain wreaks havoc on British economy; GBP recovers; UK economic data remain unchanged.

Bank of England Governor Andrew Bailey said recently that the latest surge in the number of COVID-19 infections has put the British economy in shambles, delaying the country’s recovery.

“ in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory,” he said during an online speech, adding that he expects unemployment to be over the current 4.9%, at 6.5%.

Regarding the possibility of setting interest rates below zero, he said that such a move could hurt the banking system, as it would complicate banks’ efforts to earn a rate of return and would hurt lending to other companies.

Bailey expects that economic activity will be depressed until vaccines are widespread enough to justify lifting some of the restrictions.

The coronavirus crisis continues to escalate in England due to the spread of a new strain of COVID-19. So far, 3,118,518 coronavirus cases and 81,960 total deaths have been reported since the beginning of the pandemic, making the UK the fifth most affected country in the world. The new strain is said to be more contagious, though it seems that the vaccines are still effective against it. In order to hinder its spread, the UK government decided to impose a national lockdown until the end of March.

According to England’s Chief Medical Officer Chris Whitty, the country is entering the most challenging phase of the pandemic, as hospitals are being overwhelmed and bodies are piling up.

“We’re now at the worst point of this epidemic for the UK. In the future, we will have the vaccine, but the numbers at the moment are higher than they were in the previous peak — by some distance,” Whitty said.

The UK is expected to hit its target of vaccinating 13 million people by mid-February.  

Economic Calendar

Markets learned this week that like-for-like retail sales rose less than expected at 4.8% in December (year-on-year), against November’s 7.9%. Analysts had expected it to be at 7.9%. This is the worst annual change in 25 years.

“Physical non-food stores, including all of non-essential retail, saw sales drop by a quarter compared with 2019,” said the British Retail Consortium’s chief executive. “Christmas offered little respite for these retailers, as many shops were forced to shut during the peak trading period.”

Pound Recovers

So far this week, the pound sterling gained 0.24% against the US dollar, recovering from the previous week’s losses and gaining back lost ground at the beginning of the week.

The pound’s losses at the beginning of the week were attributed to expectations for negative cash rates, right after Monetary Policy Committee Member Silvana Tenreyro said that further cuts would continue to provide economic stimulus.

“GBP will have to brace itself for another wave of negative rate headlines,” said an analyst at ING. “GBP will be vulnerable to negative rate talk during lock-downs and EUR/GBP risks 0.91.”

The bank is currently divided regarding the feasibility of imposing negative cash rates, though Tenreyro said that at this point, the conclusion of such discussion seems obvious.

“Once the Bank is satisfied that negative rates are feasible, then the MPC would face a separate decision over whether they are the optimal tool to use to meet the inflation target given circumstances at the time,” she said.

The general weakness of the pound since the beginning of the year is linked to the current coronavirus situation. As we already mentioned, the country is now facing its worst moment since the beginning of the pandemic and has yet to begin a massive vaccine rollout.

UK Economic Data Unchanged

Since our last report, the main economic indicators have remained unchanged.

November’s inflation data were way below the Bank of England’s inflation target, which is currently at 2 percent. The Consumer Price Index was below expectations, falling by 0.3% in yearly terms, after rising by 0.7 percent in the previous period. In monthly terms, it went down by 0.1 percent, also against projections, and underperforming the previous month’s figure.

The gross domestic product expanded by 16.0% in the third quarter, over expectations of 15.5%. Unemployment data shows an improving labor market at 4.9%, also against expectations of 5.1%, after being at 4.8% in the previous period.

Upcoming Events

• On Friday, the Office for National Statistics will publish the industrial and manufacturing production data.

• Also on Friday, the gross domestic product data will be released.

• The trade balance data will also be published on Friday.