FX: Why Fake Outs Are More Likely Than Breakouts

FX: Why Fake Outs Are More Likely than Breakouts

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 Powell said tapering will begin this year but he stopped short of specific timing which capped the 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 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 their reopening did not move into Step 1 until June 11th and while Quebec began easing restrictions late May, they 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.

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