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USD: Reversal or Retracement as Hawkish Fed Comments Continue

USD: Reversal or Retracement as Hawkish Fed Comments Continue

Talking Points:

- The U.S. Dollar gapped higher to start the week after hawkish comments from Vice Chairman of the Federal Reserve, Mr. Stanley Fischer.

- This continues a pattern of hawkish Fed commentary as similar instances took place in speeches last week from Mr. William Dudley and Mr. Dennis Lockhart, Presidents of the New York and Atlanta Fed.

- 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. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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For the past three weeks there’s been a growing dissension amongst Fed opinions and market expectations regarding near-term interest rate trajectory out of the United States. While markets are seemingly expecting the Federal Reserve to stay loose and passive with monetary policy, Federal Reserve members are getting increasingly bolder in their verbiage regarding rate hikes in the not-too-distant future.

Just last week we heard from Mr. William Dudley, President of the New York Fed, and Mr. Dennis Lockhart, President of the Atlanta Fed, who both provided hawkish comments concerning near-term rate hikes. And in a speech over the weekend, Federal Reserve Vice Chairman Mr. Stanley Fischer said that U.S. economic conditions are close to hitting the Fed’s targets, giving yet another nod to a potential rate hike in September (or December). And while these comments have collectively provided some element of strength into the Greenback, this definitely hasn’t been one-sided as rips higher have been sold rather aggressively.

Created with Marketscope/Trading Station II; prepared by James Stanley

From the above chart, you can see that the swing-high set during the release of FOMC minutes last week provided a high that the Greenback has yet to eclipse. And in a week in which the Jackson Hole Economic Symposium begins (August 25-27), there is plenty of opportunity for Central Bankers to continue talking around interest rate trajectory.

Are We in For a Redux of May?

Throughout the month of May, multiple Fed members talked up the prospect of rate hikes at the bank’s next meeting in June; and just like we’re seeing now, it took a bit of time for markets to begin to actually price this in. After the April FOMC rate decision saw a slightly ‘less-dovish’ tweak to the bank’s statement, traders continued to sell the US Dollar into the first week of May. But as various Fed members began to talk up higher rates and then when the release of the meeting minutes from the April meeting came right out and said that the bank felt that markets were underpricing the probability of a hike in June, traders quickly began buying USD for fear of being left behind should the bank tighten policy at their next meeting.

This led to a continuation of Dollar-strength all the way until the release of Non-Farm Payrolls on June the 3rd; and when NFP’s printed so abysmally below expectations, markets began to sell the Dollar again as the prospect of Fed rate hikes in the face of slowing labor market data became a more distant possibility.

Created with Marketscope/Trading Station II; prepared by James Stanley

We’ve already seen a similar such occurrence taking place around the most recent FOMC meeting in July. After the Fed posed another ‘less dovish’ statement on July 27th, an abysmally bad GDP report two days later sent the Dollar sinking lower, and that downside-run lasted all the way until last Thursday. This is yet another example of markets expecting the Fed to remain loose and passive despite their claims to the contrary; but as the growing choruses from various Fed members have begun to become louder, the Dollar has staged a top-side move that’s run directly into that prior point of resistance.

Created with Marketscope/Trading Station II; prepared by James Stanley

Support Zone of Interest

For those looking to stage top-side plays in the U.S. Dollar this week as we near the Jackson Hole Summit, there’s an interesting area of support to watch for in the U.S. Dollar. At the level of 11,891, we have the 61.8% Fibonacci retracement of the May 2015 low to the January 2016 high. And just one point above that we have the 50% Fibonacci retracement of the most recent bullish move (shown in orange below). This was also the close for last week’s price action, just ahead of the weekend gap on the heels of Stanley Fischer’s comments.

Created with Marketscope/Trading Station II; prepared by James Stanley

Should support develop in this zone during the early portion of the week, this could be an attractive area to investigate long-USD positions against currencies like the Japanese Yen, the Swiss Franc, or perhaps even the Euro.

--- Written by James Stanley, Analyst for

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.