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.

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.