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A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

2017-02-01 14:32:00
James Stanley, Strategist
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Talking Points:

- Today at 2PM ET brings another FOMC meeting.

- Little is expected by way of new information. Far more interesting is price action in USD and USD-related markets as we near today’s meeting. Below, we focus-in on strategies for both USD-strength and weakness.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).

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USD Pinned to Support Ahead of FOMC

Over the past few weeks, we’ve been discussing the retracement in the U.S. Dollar that lasted for most of January, and at this point we’ve seen more than 50% of the post-Election move in the Greenback wiped away. And while this does raise questions on the sustainability of that bullish move that started with an aggressive reversal on the night of the U.S. Presidential election, traders will likely want to evaluate price action in response to the remainder of this week’s data before making any long-term deterministic decisions on the Greenback.

Today at 2PM we get the Fed; and on Friday we get Non-Farm Payrolls for the month of January, so this week can bring a big change-of-pace to USD, one way or another.

The Dollar’s price action has been rather weak throughout January as the Fed has been rather silent throughout the month. Janet Yellen had one relevant public appearance in January in which she echoed what she had previously said in December regarding the expectation for ‘a few hikes this year’. And this brought a quick burst of strength into the Dollar, albeit short-lived as sellers took back over.

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

Chart prepared by James Stanley

This run of weakness in USD leaves the Dollar’s intermediate-term price action in a rather precarious state. On the chart below, we’re zoning-in on the post-Election move in USD, and notice how the December swing-low is showing current price action support, with the 50% Fibonacci retracement of the post-Election move serving as near-term resistance.

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

Chart prepared by James Stanley

For USD Weakness Strategies

Of recent, both the Euro and Cable have begun to show semblances of bullish price action, and to be sure at least a portion of this is likely related to that recent inclusion of USD weakness. But given geo-political pressure points, there may be some motivation for trends in each of these markets to continue developing; as both economies were previously being sponsored by outsized QE programs that are unlikely to be increased or extended. In March, the ECB’s first QE program expires and that will leave the bank with €60 Billion a month in QE outlays for the rest of the year, which would effectively be a taper from the bank’s prior €80 Billion/month program.

And in the U.K., the ‘sharp repricing’ in the value of the British Pound around the Brexit referendum and the subsequent dovish-drive from the BoE has the potential to continue producing higher-than-expected inflation figures in the coming quarters. This is what brought a brisk change-of-pace to the British Pound in November as the Bank of England acknowledged heavier inflation pressures, and with another Super Thursday on the docket for tomorrow, we’ll see how much more pressure may have grown over the past three months in the U.K. as global markets were bursting at the seams with excitement around the ‘Trump Trade’.

On the hourly chart below, we’re looking at the British Pound’s price action over the past two-and-a-half weeks as a bit more clarity has been delivered around Brexit. After gapping lower and testing the 1.2000-handle, the pair ripped-higher after Theresa May’s Brexit speech and then the U.K. Supreme Court ruling a week later. And then after a quick 38.2% retracement of that bullish move, buyers returned to push prices back up towards the one-month high.

Given the numerous points of potential resistance in the 125-pips above current price action, traders can look to buy support in the event of USD-strength on the back of FOMC today.

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

Chart prepared by James Stanley

And on the hourly chart of EUR/USD below, we’re looking at the rather consistent up-trend that’s developed since the beginning of the year. After EUR/USD set a new low at 1.0340 shortly after the open of 2017, price action has been consistently bullish, with higher-highs and higher-lows.

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

Chart prepared by James Stanley

For USD-Strength Strategies:

The pair that really appeared to maximize USD-strength during the post-Election run was USD/JPY. And even during the January retracement, the move-lower in USD/JPY was moderated as opposed to what was seen in general USD trends. While the DXY setup above is currently seeing resistance at the 50% retracement of the post-Election move, USD/JPY has remained above the 38.2% retracement throughout the month, and this highlights the fact that the Yen has had its own bout of weakness, even if less than that of the Greenback. If we do see Dollar-strength develop, USD/JPY will likely remain an attractive venue for such a theme.

On the hourly chart below, we examine intermediate-term price action in USD/JPY in the effort of trading top-side, bullish continuation.

A Weak U.S. Dollar Runs into the Fed: GBP/USD, USD/JPY Primed

Chart prepared by James Stanley

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

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