By Zac, CountingPips.com
Today, I am pleased to share a forex interview/commentary on this week’s major events and forex trends with the Senior Currency Strategist at DailyFx.com, John Kicklighter. John specializes in combining fundamental and technical analysis with money management while his analysis for DailyFx regularly includes G10 fundamental forecasts, risk sentiment analysis and carry trade analysis.
Q: There are many major data releases on the schedule this week, what do you feel may turn out to be the most important event to watch for?
There is a lot of currency-specific event risk out there that has considerable potential for generating volatility for the data’s native currency. However, if we want to see a real move (one backed by momentum); we will need something that will tap into the underlying interests of the speculative market and initiate a trend that spans the 
various currencies and asset classes. And, despite the importance of the data we have on deck; it doesn’t carry much promise of encouraging such a momentous shift. That said, the most charged catalyst over the week is probably the inflation picture from the UK as speculation about near-term rate hikes is so high. There will be a lot of interest specifically in the BoE Quarterly Monetary Policy Statement.
Q: What do you feel is the biggest overall theme at play in the currency markets right now?
Oddly enough, it is the lack of an overarching theme that has kept the markets back from a major trend. A steadfast build up in yield-based capital markets has kept risk trends in charge; but we have seen little progress on the investor sentiment front (consistent as it is, there is little conviction). If risk trends shifted significantly in the near future; it would almost certainly drive the entire FX market with it. A distant second theme that has raised its profile is interest rate speculation. Those at the upper end of the curve (the Aussie and Kiwi dollars) have seen their potential for further rate hikes ease off while others near the bottom of the pack (like the pound) look as if they may be closing the gap this year.
Q: Inflation data released out of the United Kingdom also looks to be a key event for the week with many market participants feeling the Bank of England will need to raise interest rates to tame increasing inflation. Would another high inflation reading likely give the British pound sterling a boost against the other major currencies?
The CPI figures did contribute to a substantial pound rally. Speculation surrounding the timing of a UK-based rate hike has grown increasingly tense over the past few months as data maintains rising price pressures and the BoE loses credibility in its projections that it is a temporary state and will ease off in the near future. That said, if the monetary policy officials continue to make accommodation for the persistent increases in inflation; then speculators will not find the vindication they need. If that is the case, they will eventually back off the trade.
Q: Overall, the US dollar has been stronger against most of the major currencies since the beginning of February. Do you feel this move has sustainability in the short to medium term? What currencies will likely see continued weakness against the dollar?
The dollar’s moderate strength since the beginning of the month seems to be more a correction of January’s sell-off rather than a self-generated recovery. The difference here is that a correction struggles for progress and is naturally limited as it is just playing off the initial drive from the originating move. Without definable fundamental support, this advance will eventually stall. If risk appetite falls apart at a controlled pace, I’d look for USDJPY and USDCHF to extend their respective drives. AUDUSD is staged for a significant medium-term bearish trend on any substantial shift in risk appetite trends. EURUSD and GBPUSD are much more data dependent.
Q: The USD/CAD currency pair continues to be an interesting one to watch with the pair trading in a fairly tight range and any moves higher seem to be beaten back down to the 0.9850 level. Do you feel it is likely this pair coming out of this range anytime soon and what could we look to as a possible catalyst either to the upside or downside?
USDCAD is a pair that is prone to congestion. It is not always carving out the most technically-consistent range; but the chop is an indelible feature of the pair’s price action. I would say the range is set between parity and 0.9850. A break from this pattern wouldn’t be too difficult; but the follow through will be a real struggle. If the dollar can jump start a substantial rally against the euro and Australian dollar; it will likely spill over to USDCAD as a general dollar bid.
Q: The AUD/USD pair last week failed to retest or surpass the 1.0255 all time high made in late December and now the pair is trading closer to its parity level vs the dollar. On a technical basis, what important levels should we be looking at to tell us whether a deeper correction is in the cards or if the uptrend will continue to resume?
AUDUSD is setting up what looks to be an ever-adapting reversal pattern. In fact, from the beginning of October; it looks like we have setup a major head-and-shoulders pattern. Of course, the trouble is the neckline or reversal point. We could say it is the rising trendline from May that is loosely stationed around 0.9975, the 100-day SMA at 0.9920, the rising trend of lows from December 8th at 0.9900, or the congestion low from January at 0.9850/25. Momentum is the better signal here rather than a single technical level.
Thank you John for taking the time for participating in this week’s forex interview. To read John’s latest currency analysis and trading strategies you can visit DailyFx.com.
