US Dollar Talking Points:
- It was a big week in FX, driven by the FOMC rate decision on Wednesday.
- The Fed’s less dovish forecast helped to elicit a strong run of strength in the currency, and this produced outsized moves in major pairs of EUR/USD, GBP/USD, USD/CAD and AUD/USD. But, which pairs are best situated for continuation and which may be set up for reversal themes?
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
With the FOMC now in the rearview mirror we can say that this is one of the FOMC rate decisions that brought some element of volatility. The bank took on a tone that was a bit more hawkish than what many were looking for. This may have been discounted to a degree during the press conference when Jerome Powell urged to take the dot plot ‘with a big grain of salt.’
To be sure this wasn’t the first time that we heard Chair Powell attempt to shift the market’s focus away from the Fed’s interest rate projections. Because, after all, they’re mere projections and subject to revision as new data or information becomes available. But, markets may not have heard that ‘grain of salt’ part as prices have been running ever since that Wednesday meeting. Probably the most noticeable shift so far has been in the US Dollar, which has moved up by as much as 2.73% over the past week.
As I had shared in the Tuesday webinar, my bias was for US Dollar strength even despite having a longer-term bearish bias. The big challenge for bears over the past month has been a huge spot of confluent support around the 90.00 handle on DXY. This is the same zone that stalled the sell-off at the beginning of this year and after coming back into play in mid-May, a similar effect began to show.
US Dollar Daily Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
With little expectation for the Fed to do anything more dovish at this week’s rate decision, the more attractive side of the matter appeared to be USD-strength and that’s continued to play through. The big question now is for how long might this continue and with the Fed’s blackout window for the June rate decision now passed, fully expect Fed-speak to come back into the equation in the next week as markets begin to shift on the basis of these updated forecasts.
On a shorter-term basis, the USD shredded through a number of resistance zones in the aftermath of the Fed. This presents a few areas of interest for higher-low support tests, the nearest of which plots around 91.82-91.93, between a couple of longer-term Fibonacci levels.
To learn more about Fibonacci, check out DailyFX Education
US Dollar Four-Hour Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD Sinks
It was a big week in the Euro but, EUR/USD in particular. The pair had a bearish setup ahead of the Fed which I talked about on Tuesday in both the webinar and the pre-FOMC article for US Dollar Price Action Setups. It was a simple matter of resistance showing at prior support, but as bears piled on after the Fed and through Thursday trade, the move continued to deepen with the pair hurriedly pushing down to fresh two-month-lows.
At this point, EUR/USD is short-term oversold but there’s room until that next big spot of support may come into play, plotted around the 1.1700 handle which also constitutes the 2021 low in the pair.
For those with patience, there may be some resistance potential around the 1.1965-1.2000 zone; but that’s fairly far away for right now. Below I’ll take a shorter-term look into EUR/USD.
EUR/USD Daily Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
On a shorter-term basis, and for those moving towards the EUR/USD sell-off in a more aggressive manner, there may be some workable context around the 1.1900 handle. This was a quick zone of support/resistance established during the Thursday sell-off.
The way the market treats this area on Monday will be important. A hold at this zone keeps the door open for bearish trend continuation. A breach above makes that 1.1965-1.2000 zone look a bit more operable for similar approaches.
EUR/USD Hourly Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
GBP/USD: Cable Crushed, Revert to Support
When I lined up GBP/USD ahead of the Fed, it looked like one of the few major pairs that could hold some attraction for short-side USD-scenarios.
That was dashed quickly and the pair has continued to fall ever since. The pullback here does feel a bit more moderate than what was looked at above in EUR/USD, however, and for those that are looking to push a long-USD thesis, EUR/USD may remain as a more attractive candidate.
In GBP/USD, however, the pair is interacting with a support level that was in-play in early-May. This is around the 1.3800 handle, and it came in to help set the lows after the pair had failed at 1.4000. But, after that support hit, GBP/USD trounced up to a fresh three-year-high and began to find resistance at the 1.4250 psychological level.
But now? The pair is back at 1.3800. It’s difficult to call for a reversal of a pullback here given how heavy this USD-move has priced in. But, a hold here through Monday trade could keep that door open. There’s a reference level around 1.3880 that could be incorporated, as well, possibly as a first area of resistance in the event of a support hold or, for those that are bearish, possibly as an area of lower-high resistance ahead of a re-test of the 1.3800 handle.
GBP/USD Daily Price Chart
Chart prepared by James Stanley; GBPUSD on Tradingview
USD/CAD Rockets Higher After Failed Test at Big Fig
I’ve been following this one pretty closely over the past few months. In April, the BoC became on of the first developed Central Banks to begin looking at post-pandemic policy.
That, combined with a strong run in Oil prices helped to bring a super-charged Canadian Dollar into the mix, and when that was meshed with a weak US Dollar in the month of May, prices in USD/CAD really started to slide. And that slide continued all the way down to fresh six-year-lows. But sellers were unable to test through the 1.2000 psychological level, coming just two pips shy of a test before selling pressure began to slow.
To learn more about psychological levels, check out DailyFX Education
Soon, reversal tendencies started to show and this opened the door to a counter-trend move, and prices started to trend-higher even ahead of FOMC. When the Fed spoke on Wednesday, that just furthered that theme and USD/CAD put in a strong topside rally as the USD jumped.
At this point, USD/CAD has pushed back above a pretty important trendline, highlighting continuation potential. Just ahead on the chart are a couple of key spots around the 1.2500 psychological level after which the 1.2622 Fibonacci level comes back into the picture.
USD/CAD Daily Price Chart
Chart prepared by James Stanley; USDCAD on Tradingview
AUD/USD Breaks the Range
AUD/USD has pushed down for a support test of the very key psychological level around .7500. This price has so far held the lows, but this can remain an area of interest for USD bulls looking at continuation scenarios.
For short-term resistance, there’s a Fibonacci level of interest around .7574, and there’s a prior price action swing around .7650. On the underside of price action, there’s not much that’s nearby, but there’s a prior swing around .7350 that may become usable. The big spot on the AUD/USD chart underneath current price is around .7132-.7185.
AUD/USD Daily Price Chart
Chart prepared by James Stanley; AUD/USD on Tradingview
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
