Talking Points:

- The U.S. Dollar is moving-lower after encountering a key zone of resistance, and this is showing strength in EUR/USD and GBP/USD. An Analyst Pick was published for a Bullish EUR/USD setup.

- Tomorrow brings the release of FOMC minutes from the September rate decision. The Dollar had remained relatively strong around that meeting – Will the minutes reverse that trend and bring back the USD-bears?

- DailyFX Q4 Forecasts have just been released - Click here for full access.

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In yesterday’s article, we looked at the U.S. Dollar being in a rather precarious position after tagging a key zone of resistance to finish off last week. Of course, last week ended on a rather sour note as Non-Farm Payrolls printed with the first contraction in over seven years (September, 2010). While this is being discounted to a degree, given that Hurricanes Irma and Harvey drove large portions of the U.S. economy into standstill during September, it’s still a rather shocking number that doesn’t quite instill confidence as the Federal Reserve is appearing to take a headstrong approach towards another rate hike this year.

Previously, Chair Yellen had said that inflation below the Fed’s 2% goal would not necessarily preclude the bank from hiking rates. But this element of slowdown in the labor force is another matter entirely, as employment has been one of the few consistent strong points for the U.S. economy while inflation has tapered-lower after the December and March rate hikes. It was in March, when the Fed began discussing the prospect of balance sheet reduction that the move of USD-weakness really took on life. And throughout the summer, as balance sheet reduction received more and more focus, market expectations for rate hikes out of the Fed whittled lower as markets grew skeptical that the Fed would be able to hike again while a) tightening policy via the balance sheet and b) while inflation remained below 2%.

This led to an aggressive down-trend that saw as much as -12.33% of the Dollar’s value erased this year. As we moved into Q4, USD had started to show a bit of strength to move up to a key zone of resistance that runs from 94.08-94.30; and at this point, that resistance has held as sellers have begun to show.

U.S. Dollar via ‘DXY’ Daily: Resistance Holds for Potential Lower-High in Bearish USD Continuation

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

In yesterday’s article, we looked at three support areas on shorter-term USD charts in the effort of identifying when the bigger-picture down-trend might be coming back into the Greenback. At this point, DXY is testing the first of those support levels around 93.26, and further down-side run opens the door for bearish USD-continuation strategies.

U.S. Dollar via ‘DXY’ Four-Hour: Short-Term Support Tests After Response at Resistance Zone

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

As that theme of USD-weakness has started to show again, EUR/USD and GBP/USD have put in bullish moves that may be opening the door for top-side continuation, particularly for those looking to take on short-USD exposure. We’ve been following a key zone of support in EUR/USD that runs from 1.1685-1.1736, and after a down-side test on NFP last week, that support has held and prices have begun to move-higher.

EUR/USD Daily: 23.6% Retracement of 2017 Trend Runs into Confluent Support Zone

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

We had pointed out two short-term resistance areas that could open the door to bullish continuation in EUR/USD yesterday. The first of those prices was a previous swing-high at 1.1788, and that level has been taken out. The next remains un-encountered at 1.1833, and a break-above this levels gives us a fresh two-week high, and an even more attractive prospect of bullish continuation as the bigger-picture trend returns.

EUR/USD Hourly: Higher-Highs as Short-Term Price Action Turns-Bullish

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

GBP/USD

While longer-term EUR/USD charts remained bullish for much of the September retracement, the British Pound is another story altogether. After a brisk topside run in the early-portion of September ran into mid-month, resistance built around 1.3600, and after about a week of struggling to take out that level fell-flat, sellers took over to drive the move-lower. But that retracement was rather aggressive, with about 70% of the previous bullish move erased over a two-week period, including a fast drop through a key zone of support that runs from 1.3117-1.3187.

On Friday of last week, a bit of support began to show just ahead of the 1.3000 big figure, and as we opened into this week, a series of bullish factors helped to drive the Pound-higher, with prices now testing the 1.3200-handle. On longer-term charts, this can appear rather attractive for bullish continuation, given that support showed-up ahead of 1.3000 and before running into a bullish trend-line. But, shorter-term price action is a bit more suspect, which we’ll look at on the second chart below.

GBP/USD Daily: 1.3600 Proves Indomitable, Aggressive Retracement Follows

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

On the hourly chart below, we can see the rather smooth recovery that’s shown in the pair, with price action offering a brief bout of resistance at each barrier of the zone, first at 1.3117 and then at 1.3187, before eventually taking over each level. And while this, in isolation, would be rather bullish, if we consider how aggressive the prior retracement was, Sterling bulls would likely want to allow for some additional confirmation before looking to chase the move-higher. On the chart below, we include two near-term resistance levels based on prior price action that could assist with such a signal.

Cable Hourly: Threat to Near-Term Down-Trend; Resistance Levels Applied

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

On the long-USD side of the coin, we’ve been following USD/JPY. As USD-strength showed a bit more prominently in the final few weeks of September, USD/JPY came to life, rising by as much 600 pips in less than a month. Included in this top-side run was a bullish break of a key zone of support/resistance that runs from 111.61-112.43. This zone is derived from a series of longer-term Fibonacci levels, and while USD/JPY has put in a longer-term range-bound formation over the past few months, this zone has offered numerous inflections on both sides of price action.

USD/JPY Daily: Key Zone Helping to Set Near-Term Support After ¥113.00 Resistance

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

Since breaking-above that longer-term zone two weeks ago, bulls have been unable to substantiate any significant strength above the ¥113.00 psychological level. As prices have tilted-lower to test the top-side of this zone, support has shown as buyers have shown back-up. But the longer that we test support around 112.43, the more likely a deeper retracement could appear to be. Given that we have a rather large zone here, this could allow for a retracement within the zone while price action remains bullish.

The key would be for higher-low support to show above prior swing-lows, and on the chart below, we’re looking at three relevant swings below the longer-term zone; and if these swing-lows get taken out, the prospect of bullish continuation will look considerably less attractive.

USD/JPY Four-Hour: Support Holding at Key Zone, Subordinated Support Applied

U.S. Dollar Drops Ahead of FOMC Minutes; EUR/USD, GBP/USD Catch Bids

Chart prepared by James Stanley

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

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