Talking Points

- The remainder of this week brings a number of drivers out of the United States, including the Senate confirmation of incoming Fed Chair, Jerome Powell.

- The Euro continues to run, but retail continues to sell EUR/USD. IG Client Sentiment is currently -2.05, click here to access in real-time.

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In yesterday’s article, we looked at the U.S. Dollar after falling to a fresh two-month-low as we started on a calendar with a decent breadth of data for this week. The U.S. Dollar, in particular, has some interesting items over the next few days, and on Thursday we get inflation numbers out of Europe. This should be particularly interesting given the German GDP report that came out two weeks ago, effectively reversing the bearish move in the Euro that had shown up after the October ECB rate decision. Also on Thursday is a critical OPEC meeting that will likely determine the trajectory of Oil prices as we move into next year. Below, we’re looking at price action themes as we approach this heavy outlay of drivers.

The U.S. Dollar

This week is full of U.S. related drivers. Later today brings U.S. Consumer Confidence, and tomorrow is GDP for Q3. We also have some Central Bank-speak spattered throughout the next couple of days with the highlights being Mr. Jerome Powell’s confirmation hearing before the Senate later this afternoon; and then tomorrow outgoing Fed Chair Janet Yellen will be speaking in front of the Joint Economic Committee of Congress. Thursday brings the release of the Fed’s preferred inflation gauge of PCE, and Friday brings ISM Manufacturing. Below, we’re looking at the high-impact USD items taken from the DailyFX Economic Calendar.

High Impact USD-Related Events for the remainder of this week via the DailyFX Economic Calendar

U.S. Dollar Drop in the Spotlight Ahead of Powell, GDP

prepared by James Stanley

As we looked at yesterday, the Dollar opened the week with fresh two-month lows, extending the drop that had started three weeks ago and hastened considerably last week. And this comes on the heels of the first real ray of hope that Dollar bulls had for this year after the Greenback had climbed above a key area of resistance in latter-October.

Support began to show yesterday around the 61.8% retracement of that recent bullish move; and since then prices have trickled up to the 50% retracement of that same move, which is currently serving as an element of near-term resistance.

U.S. Dollar via ‘DXY’ Four-Hour: Support at the 61.8, Resistance at the 50% Fib Retracement

U.S. Dollar Drop in the Spotlight Ahead of Powell, GDP

Chart prepared by James Stanley

While it may be simple to write off the Dollar as we head towards year-end, traders will want to keep in mind the longer-term nature of the setup in the Greenback. As we came into 2017, the Dollar was in the midst of an aggressive top-side run that had started in 2014, just as markets were trying to get in front of the eventual stimulus exit and higher rates out of the United States. The aggressive sell-off seen in the Dollar this year wiped away 50% of that move, and support began to show around the 50% retracement at 91.36.

U.S. Dollar via ‘DXY’ Weekly: 2017 Sell-Off Retraces 50% of 2014-2017 Bullish Run

U.S. Dollar Drop in the Spotlight Ahead of Powell, GDP

Chart prepared by James Stanley

The reason that this is relevant is that we may be in the process of a longer-term theme or shift in the Dollar after what could be considered a pullback in the longer-term trend. Combine this with a new incoming Fed Chair, a Federal Reserve that has remained fairly persistent on the hawkish tune this year, and an ECB that doesn’t appear ready to start pulling back the reigns on stimulus – and this could create an interesting backdrop in which Dollar strength may surprise as we move through December.

Nonetheless, near-term price action in the Dollar is bearish. So, for those looking to implement a bullish approach, they’d likely want to wait for some additional confirmation. A re-test of 93.50 can open the door for higher-low support to be sought out around 93.00; but, until then, price action is bearish in nature and traders can continue to target lower levels around 92.00-flat.

U.S. Dollar via ‘DXY’ Four-Hour: Lower-Lows, Lower-Highs Following Break Below 94.00

U.S. Dollar Drop in the Spotlight Ahead of Powell, GDP

Chart prepared by James Stanley

EUR/USD

On the other side of that recent breakdown in the Dollar is the Euro, which has seen a strong return of bullish price action after the late-October sell-off. The ECB-induced fall in the Euro only lasted for a couple of weeks, but it was the German GDP report released two weeks ago that really seemed to prod bulls back-in. This report showed that Germany grew by .8% in Q3, and this drove the Euro-Zone as a whole up to .6%. This means that Europe will likely be growing faster than the United States this year; and the Fed has hiked four times over the past two years with a very likely fifth on the way in a couple of weeks. The ECB, on the other hand, has just extended QE for another nine months, and while the amount of bond purchases each month will be lower than before, the European Central Bank is effectively diverging from the Fed.

If the global growth story is to continue, the ECB may have some catching up to do, and this is likely one of the primary drivers of that Euro strength even as the ECB remains about as dovish as they can.

The Euro, meanwhile, has been strong for much of the year as markets try to get in-front of any potential stimulus exit or taper or even higher rates that may be in the offing for the ECB. This is not too dissimilar from what was seen in the U.S. Dollar in 2014-2015, when rampant strength was coming-in even without any directly hawkish or bullish drivers.

Euro-Zone CPI is released on Thursday, and this comes out right after German employment figures. This will likely be the key driver for the single currency this week. Bulls are currently holding on to recent gains, with a bit of support showing off a prior area of resistance. This area of resistance comes from a group of swing-highs in October that runs from 1.1838-1.1880, and this zone had helped to form a shooting start that offered the last attractive short-side set in EUR/USD. As long as buyers continue to hold support around this zone of prior resistance, the door remains open for a re-test of the 1.2000 psychological level in EUR/USD.

EUR/USD Four-Hour: Near-Term Support at Prior Resistance 1.1838-1.1880

U.S. Dollar Drop in the Spotlight Ahead of Powell, GDP

Chart prepared by James Stanley

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

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