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Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

James Stanley, Strategist

Talking Points:

- This week’s big item on the calendar is the Jackson Hole Economic Symposium, with key speeches to be held by Fed Chair Janet Yellen and ECB President Mario Draghi.

- The U.S. Dollar has had a brutal 2017, and so far in August we’ve seen a response at the lows at it appears as though the Greenback is trying to carve out a bottom. At this point, the formation is a bear-flag, and we look at setups on either side of the Dollar with EUR/USD and GBP/USD below.

- If you’re looking for trade ideas, check out our Trading Guides. And if you’re looking for shorter-term ideas, please check out our IG Client Sentiment.

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The week has started off with a whimper as markets cast their steely gaze towards the Jackson Hole Economic Symposium set for later this week. As we discussed on Friday, Jackson Hole is the big event on this week’s economic docket, and with speeches to be delivered on Friday from Fed Chair Janet Yellen and ECB President Mario Draghi, the potential for volatility remains high going into next weekend.

The big topic at the Symposium will be Quantitative Tightening. In the United States, the Fed is staring down the highly-untested route of balance sheet reduction while in Europe, expectations are raging for the European Central Bank to finally start stepping back from their massive stimulus outlays. To date, the ECB has delivered zero solid details about when or how this might happen; and the Fed has been very ‘Fed-like’ in delivering elusive details, saying that they’re planning on starting balance sheet reduction ‘relatively soon’.

At last year’s Jackson Hole, the Fed had the looming prospect of a Presidential Election just a couple of months later. The Dollar had spent most of last year with some form of weakness as we moved into the Symposium, but the one-two combo of Fed Chair Janet Yellen and Vice Chair Stanley Fischer were able to invoke enough motivation around the prospect of near-term rate hikes that the Dollar started to get strong, and continued to run-higher as that November election approached.

Will the Fed be able to evoke another run of strength in the Greenback? So far, 2017 has been brutal for the U.S. Dollar, as the currency remains more than 10% off of this year’s highs. Since we’ve come into August, buyers have appeared to have started trying to carve out a bottom in the Dollar, but sellers have yet to relent and price action remains pegged-down towards one-year lows.

On the chart below, we’re going back to the beginning of 2016 in ‘DXY’ as a representation of the U.S. Dollar. In Maroon, we can see the Dollar’s weak price action going into last year’s Jackson Hole Symposium. In Blue, we have the initial incline in the Dollar around Yellen and Fischer’s comments, and in Green we have the follow-thru of that movement that also includes the ramp from the Presidential Election. And then in red, we have 2017, erasing the entirety of last year’s post-Jackson Hole gains.

U.S. Dollar via ‘DXY’ Daily: A Brutal 2017 Wipes Away Entirety of Post-Jackson Hole Gains

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

As we came into August after an especially brutal July, buyers have started to show some element of response around the lows. This hasn’t turned into a bullish picture yet, because sellers continue to respond at or around resistance. But the simple fact that fresh lows haven’t yet shown, at least at this point, has to be somewhat encouraging for Dollar bulls as this was something that hadn’t shown up in the prior month. This has led to the build of a bear flag formation, as we look at on the four-hour chart below:

U.S. Dollar via ‘DXY’ Four-Hour: Bear Flag Showing

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

Getting a bit more in-depth on the hourly chart below allows us to see near-term dynamics in the Dollar, and from here, we can see short-term support showing up around 93.30, while resistance has continued to show off the 38.2% retracement of the July bearish move at 94.06. This can open the door to a couple of possibilities. A downside-break of support would be a bearish break of the bear flag formation, and this would create the possibility of short-side trades in USD, with particular interest in the long side of the Euro. On the other hand, a bullish break of 94.06, or prior swing resistance, opens the possibility of a continued move of strength in the Dollar, in which case the short side of GBP/USD could be attractive. We had looked at both of these setups in last week’s Analyst Pick of U.S. Dollar Setups Ahead of Jackson Hole.

U.S. Dollar via ‘DXY’ Hourly: Short-Term Support Around 93.30, Resistance 94.06

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

EUR/USD for USD-Weakness Strategies

On the polar end of the spectrum from the Dollar’s bear flag is the bull flag showing in EUR/USD. But – while the U.S. Dollar is below the 23.6% retracement of the July move, EUR/USD is currently testing that level as resistance, highlighting a touch of additional weakness in ‘DXY’.

The big driver of the Euro’s bullish move in 2017 has been expectations for the ECB to move back from their massive stimulus outlays as inflation has begun to show with a bit more consistency. Despite the fact that Mario Draghi has yet to make any such proclamations, markets have been growing increasingly skeptical that the ECB will be able to continue at the current pace of stimulus, with increasingly bullish reactions showing in the single currency after ECB meetings in April, June and then July. While Mr. Draghi will be speaking at this week’s Jackson Hole Symposium, traders should avoid getting their hopes high for any such announcements, as reports out of the ECB claim that this is not on the docket for Mr. Draghi. Instead, we have a pivotal ECB meeting just two weeks later (rate decision announced the morning of September 7th), and this would be a much more likely date for any such announcement.

On the four-hour chart below, we’re looking at the current retracement in the pair. The zone of support from 1.1685-1.1736 has, at least so far, been able to help hold the lows. A topside break of 1.1793 would be a fresh weekly high along with a bullish break of the bull flag, and this can open the door to topside continuation strategies.

EUR/USD Four-Hour: Bull Flag Remains

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

GBP/USD For USD-Strength Strategies

While EUR/USD is testing near-term resistance at the top of that bull flag formation, GBP/USD is testing a bit zone of support around 1.2848. We had looked at this level last week, as this is the 61.8% retracement of the most recent bullish move in the pair, and this zone held the lows in GBP/USD for pretty much the entire week after Tuesday’s sell-off sent prices spiraling-lower. This area is confluent, as we also have a trend-line projection that can be found by connecting the March and June 2017 lows in the pair.

GBP/USD Daily: Confluent Support Hanging by a Thread

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

While August has seen a bit of retracement in that prior theme of Euro-strength, the British Pound has seen a deeper sell-off after an extremely dovish BoE meeting earlier in the month. So, while investors are buying Euros and bidding the single currency higher under the presumption that the ECB will need to move towards ‘less loose’ policy in the near-term, the prospect of continued dovishness out of the BoE looks considerably more attractive given that the bank has addressed those fears around rising inflation, and continues to remain dovish.

The July low in GBP/USD at 1.2809 remains respected, at least at this point, and a bottom-side break of that low gives us fresh monthly lows, and this can open the door to down-side continuation in the pair. If a fresh low comes in, traders can look to this current zone of support in the effort of catching ‘lower-high’ resistance, with bearish targets cast towards 1.2750, and then 1.2640.

GBP/USD Four-Hour: A Break of Support, 1.2809 Opens Door for Short-Side Continuation

Will the U.S. Dollar Find a Spark of Strength at Jackson Hole?

Chart prepared by James Stanley

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

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