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USD Bounces Off of Support as Sterling Gets Smashed

USD Bounces Off of Support as Sterling Gets Smashed

James Stanley, Senior Strategist

Talking Points:

- USD ran down to a confluent zone of Fibonacci support to end last week, driven by US rate hike expectations getting kicked lower and further-out on the heels of Friday’s NFP report.

- As we move closer to the Brexit vote in the UK, polls continue to show a slight majority to the ‘leave’ camp, thereby bringing additional risk into the British Pound. GBP/USD gapped lower to start the week after another poll showed a majority of respondents would be voting to leave the EU.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

Friday’s price action saw a precipitous drop in the US Dollar as rate hike expectations for June got considerably priced-out of markets as it’s become increasingly less likely that we’ll see an actual hike when the bank meets next week. And this came after a month of May that saw multiple Fed members talk up the prospect of 2-3 rate hikes throughout 2016 which, deductively, meant that June or July would be a likely target as the bank would probably not look to hike rates in both September and December.

But Friday’s abysmal NFP print has brought that into question, and while it may sound ridiculous for such an important matter as interest rate policy to be decided by a single data point, this does speak to the larger overall slowdown that’s been seen in US data of recent. Last month’s NFP report also came in under-line and that print was revised even lower on Friday. After April’s NFP report in the first week of May, rate hike expectations for June dropped all the way to 5%. Throughout the month, as multiple Fed members talked up the prospect of 2-3 hikes in 2016, those expectations went all the way up to 30%. After last Friday’s NFP report those odds were down to 2%. So it doesn’t appear likely that we’ll be getting a hike out of the Fed next month; so the natural next question is whether we might see a move in July (26-27) or September (20-21) at the next two upcoming Fed meetings.

Speaking later today, we hear from Chair Yellen in Philadelphia and this will be the first Fed commentary that markets receive after last Friday’s NFP report. As we closed last week, the US Dollar found itself on an interesting level of support zone of 11,836-11,837 on the US Dollar Index. This is a confluent Fibonacci retracement level as 11,837 is the 61.8% retracement of the 2002 high to the 2011 low; and 11,836 is the 38.2% retracement of the prior major move, taking last April’s high to last May’s low.

Price action gapped higher to start the week and, as of this writing, has yet to fill that gap. Prices have moved to a short-term swing high in the 11,880 area as seen below. Moving forward, should rate expectations for the US continue to dwindle lower and further out into the future, we’ll likely see this support give way; and traders can use such a level in their approaches as a) near term targets for short positions and b) a basis level with which to look for short-side resumption by waiting for a break of this support, and then looking to sell resistance at the old, prior zone of support.

But if the Fed does continue talking up more aggressive rate hike policy despite the slowdown seen in data (much as what markets had to contend with in May), prices on USD can certainly continue driving higher.

USD Bounces Off of Support as Sterling Gets Smashed

Charts prepared by James Stanley

British Pound Gaps Down but UK Stocks Rally: Another gap that has yet to fill can be seen in the British Pound, after the Cable gapped lower to open the week as another Brexit poll has shown a slight majority to the ‘leave’ camp. And while these may just be ‘polls’ that might not have a huge bearing on the actual vote, the fact that we’ve seen multiple polls over the last week highlighting a slight majority to the leave camp means that investors need to take this risk a lot more seriously.

But curiously, this risk-off move is only evident in the spot rate of the British Pound, as the UK 100 has been flying higher on the day into a previous stubborn zone of resistance that price action was unable to breakthrough for two weeks.

USD Bounces Off of Support as Sterling Gets Smashed

Charts prepared by James Stanley

The British Pound, however, has not been so bullish. The chart below illustrates that major move that we saw on Friday after GBP/USD found resistance on the 61.8% retracement of the 30-year move in the pair, taking the 1985 low at 1.0500 to the 2007 high. The unfilled gap shows the move over the weekend, and thus far on the week, we can see support attempting to build around the 1.4371 Fibonacci level.

USD Bounces Off of Support as Sterling Gets Smashed

Charts prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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