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U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

2017-12-14 14:00:00
James Stanley, Strategist
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Talking Points:

- The U.S. Dollar put in a bearish move around yesterday’s FOMC rate decision after running into a key area of resistance the day before.

- This creates an interesting backdrop as we move into 2018: A shift in the voting composition at the Fed combined with improving underlying expectations and possible tax cuts in the United States could produce a surprising move in the U.S. Dollar next year.

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The past 24 hours have produced a flurry of Central Bank activity. We heard from the Fed yesterday, and that led into the trio of the Swiss National Bank, the European Central Bank and the Bank of England earlier this morning. Later today, we hear from two NAFTA participants when Bank of Canada Governor Stephen Poloz gives a speech in Toronto (the topic is, ‘Things Keeping the Governor Awake at Night’), followed by a Banxico rate decision (Mexico’s Central Bank) that carries a very high probability of a rate hike.

Despite all of these drivers, moves in the currency markets thus far have been relatively clean. U.S. Dollar weakness has come back, but this began to show even before the Federal Reserve’s rate hike yesterday. In yesterday’s article, we looked at DXY interacting with a huge zone of resistance. Prices had already started to move-lower after the CPI release earlier on the morning, and when the Federal Reserve released their statement at 2PM ET, the Dollar put in another leg of weakness.

U.S. Dollar via ‘DXY’ Four-Hour: Fold at Key Resistance After CPI, FOMC

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

Chart prepared by James Stanley

The Fed

The net take-away from yesterday’s rate hike is that the Fed remains dovish. This can be derived from the fact that the Dollar sold-off by half-a-percent around yesterday’s rate hike and through the accompanying press conference. And this somewhat echoes the pattern of how markets have responded to the Fed throughout this year, seemingly discounting hawkish variables and instead focusing on whatever dovish factors could be gleamed.

But was the Fed really that dovish yesterday? And perhaps more importantly, is that perception going to stick around for much longer as we move into a 2018 that will see a quite a bit of change within the Federal Reserve board? My colleague Tyler Yell discussed this earlier this morning, noting that two of the more dovish Fed members (both of whom dissented at yesterday’s rate hike) will not be voting members next year, and this comes as Chair Yellen gives way to incoming Fed Chair, Jerome Powell. Also of relevance – my colleague Ilya Spivak points out that the Fed’s moves within their projections weren’t really dovish at all, as we saw upgrades to expectations for GDP, unemployment, inflation and core inflation.

The one matter of pertinence that was not upgraded were rate expectations for next year. The Fed continues to look for three hikes in 2018, even with that more positive backdrop noted in their projections. This can likely be explained by the fact that Chair Yellen, who has been notably risk-averse during her tenure atop the bank, might not want to shift the Fed’s most watched-after projection as she steps down from the Fed. Yesterday was her final press conference, and shifting the expectation to four hikes next year could arguably elicit far more change than leaving the expectation at three. This could, in essence, leave a mess for incoming FOMC Chair Jerome Powell to contend with.

Nonetheless, the Dollar remains bearish from most perspectives, and traders would likely want to avoid trying to fight this trend, at least for now as yesterday just gave us another bearish indicator with price action folding after a test of resistance.

U.S. Dollar via ‘DXY’ Daily: 2017 Down-Trend Continues

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

Chart prepared by James Stanley

As mentioned earlier, the Dollar is bearish from most perspectives. One of the few vantage points that may be able to harbor USD-strength scenarios is longer-term in nature, focusing on the move that began in 2014. The Dollar rallied by more than 26% from May of 2014 to March of 2015. This was happening as ECB stimulus was starting to get priced into the Euro, and this was being driven by investors attempting to get in-front of any potential policy tightening that may be seen from the Fed as the bank stared down the end of QE and bond purchases. That move of USD-strength extended last November after the election of President Donald Trump, and the Dollar moved-up to set a fresh 14-year high.

But shortly after that high was set on just the second trading day of the New Year, bears began to take-over, and have pretty much remained in control for most of the year. The first nine months of 2017 saw a 50% retracement of that prior bullish move; and since prices ran-into that support in early-September, we have yet to establish a fresh low. This can denote the possibility of this year being digestion of the longer-term, bullish trend in USD.

U.S. Dollar via ‘DXY’ Weekly: 2017 Digests 50% of 2014-2017 Bullish Move in USD

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

Chart prepared by James Stanley

The BoE

The Bank of England’s rate decision was without significant fanfare. The BoE hiked rates for the first time in a decade last month, and when doing so shared a fairly dovish outlook into the near-future. This had operated like a wet blanket on GBP price action, at least until latter-November, when a bit of clarity on the Brexit front helped to drive a bullish move in the British Pound. Of note, the BoE did mention that the recent progress in Brexit talks reduces the probability of a ‘disorderly exit’, and given that this has been one of the key factors in the Bank retaining a dovish near-term outlook, we could see another hindrance to higher rates begin to quiet as we move towards the BoE’s next Super Thursday meeting in February.

Moves in the Pound around this morning’s rate decision appeared largely technical in nature. Yesterday, we looked at GBP trading at a key level of support around 1.3320. As USD-weakness began to take-over even ahead of the Fed, Cable started to lift and prices continued-higher through the Fed’s rate decision. By early this morning, price action had already made a stern run at the 1.3477 resistance level; but began to pullback as the BoE released their statement.

GBP/USD Four-Hour: Support Bounce at 1.3320, Key Resistance at 1.3477

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

Chart prepared by James Stanley

The ECB

The European Central Bank hosted their first rate decision this morning since extending QE in October. The bank upgraded inflation forecasts for next year by a non-negligible amount. The ECB moved their forecast for 2018 inflation up to 1.4% versus 1.2%; while keeping 2019 at 1.5%. GDP forecasts were revised quite a bit, as well, with 2018 moved up to 2.3% from a prior 1.8%, and 2019 moved up to 1.9% from 1.7%.

So, just one month after the ECB extended stimulus well-into 2018, the bank has guided forecasts higher for the next couple of years.

The Euro was already fairly strong coming into this morning’s ECB meeting. We looked at a key area of support yesterday just ahead of the Fed, and after yesterday’s FOMC rate decision, prices popped-higher and ran all the way into 1.1850 as we came into this morning. This continues the pattern of persistence strength seen in the single currency this year, even as the ECB has continued to say that they are nowhere near rate hikes; even with this continued improvement in the economic backdrop.

EUR/USD Daily: Support Bounce After Fed, Bullish Continuation into ECB

U.S. Dollar Folds at Resistance on Fed, ECB, BoE: A Recap

Chart prepared by James Stanley

The big question on the Euro as we move into 2018 is whether the currency extends its bullish run, similar to what the U.S. Dollar did all the way back in 2014-2015; even as the Central Bank appears to be nowhere near a rate hike.

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

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