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US Dollar Price Action Setups Ahead of FOMC: EURUSD, USDJPY, GBPUSD

US Dollar Price Action Setups Ahead of FOMC: EURUSD, USDJPY, GBPUSD

2018-03-21 13:34:00
James Stanley, Strategist
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Talking Points:

- Today at 2PM ET brings the March rate decision out of the FOMC. A hike at today’s meeting has long been expected, and it would be surprising if no adjustments are made. More pressing, however, is the Fed’s tolerance for rate hikes for the rest of 2018. If we see a signal for four hikes this year as taken from the Dot Plot Matrix, a string of short-term strength may develop in the US Dollar; and this could eventually become attractive for selling USD into the longer-term bearish trend.

- We look at three Dollar-pairs below in EUR/USD, USD/JPY and GBP/USD, each with varying degrees of attractiveness for short-side USD plays. EUR/USD may have a deeper retracement in store before the longer-term trend is ready for resumption, while USD/JPY continues to tangle around long-term support. GBP/USD, on the other hand, appears to have already gotten started with that bullish trend resumption, and tomorrow’s Bank of England rate decision will likely keep the pair on the move.

- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

If you’re looking for short-term indicators around the US Dollar, check out our IG Client Sentiment Indicator.

FOMC On Deck

Today at 2PM ET brings the Federal Reserve’s March rate decision. A hike at today’s meeting has been long assumed, and probabilities for a 25 basis point adjustment remain at 94.4%. So, it would be a far bigger surprise if we didn’t get a hike later today. More pressing, however, is the Fed’s tolerance for rate hikes for the remainder of the year. Current market assumptions are looking for three moves in total from the Fed in 2018; but after Mr. Powell’s first major public appearance in-front of Congress earlier this month, odds for a fourth hike have continued to grow and are currently sitting at 39.2%. (All probabilities derived from CME Fedwatch)

Despite all this hawkish drive, and even though the Fed is one of the few major Central Banks in the midst of tightening policy, the US Dollar remains near those three-year lows that were set just last month.

US Dollar via ‘DXY’ Weekly Chart: Fibonacci Support in January, February Helps to Hold the Lows

us dollar weekly chart

Chart prepared by James Stanley

US Dollar Weakness as the Fed Remains Hawkish - A Fiscal Conundrum

While rate hikes and tighter policy are often positives for an economy’s currency, that hasn’t been the case around the US Dollar. The Greenback began trending-lower a year ago, and that move has largely continued into 2018. The fact that such a pronounced move of weakness has shown even as the Fed hikes rates while the BoJ, the ECB and the RBA all try to avoid the topic of rate hikes; and this points to the fact that there’s another major driver here. As we discussed on multiple occasions this year, that major driver is likely emanating from US fiscal policy and the fact that the Treasury department is going to need to raise a considerable amount of funds over the next few years.

With half-a-trillion in extra spending and an extra trillion for tax cuts, a US government that runs a deficit will need to finance these initiatives by issuing more debt. This is also happening as the Fed moves deeper within their Quantitative Tightening strategy, looking to reduce the balance sheet that had ballooned beyond $4 Trillion during the multiple rounds of QE. So – in the key market of US Treasuries, traders will need to contend with a) more supply and b) less demand; both of which point to lower prices. This matches up with the spike in Treasury yields that has been seen so far this year, as the 10-year Note closed December at 2.4% and has went as high as 2.94% already in 2018.

10-Year US Treasury Note Yields Jump in 2018, From 2.4% to 2.88% (High of 2.94%)

Yield on US Treasury 10-Year Notes, Monthly Chart

Chart prepared by James Stanley

Less demand for US Treasuries combined with more demand for foreign bonds, particularly those that are being supported by additional demand from the representative Central Bank, can help to explain why the Dollar has been so incredibly weak while currencies such as the Euro or the Yen continue to display strength – even though those CB’s appear to be far, far away from any actual rate hikes themselves.

This speaks to the comment from legendary trader Paul Tudor Jones that made its way through markets in early-February, in which he said, “If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal.”

The US Dollar Ahead of FOMC

As we move into today’s FOMC meeting, there is a legitimate prospect of some US Dollar strength showing up. The key word there being ‘some’, as this would likely happen within the scope of that longer-term bearish trend. The big question is whether the Fed signals four rate hikes: And this can be gleamed from the dot plot matrix that will accompany today’s rate decision. If we do see the Fed forecast four total hikes in 2018, including todays, then we could be looking at a couple of weeks of strength as we move towards the end of Q1 and the open of Q2. With a down-trend that’s seen as much as 15% of the Dollar’s value erased, it reasons to imagine that there are a considerable number of short positions out there. Those short positions may get jumpy if the Fed increases the hawkish language, and this could allow for a deeper retracement in the US Dollar.

Price action in the Greenback has been showing expansion since February, with both a higher-high and a lower-low. This is sometimes called a ‘megaphone pattern,’ and similar to a wedge, this will often show up ahead of a ‘big’ move. The problem with a megaphone is that it’s non-directional in nature, perhaps even more so than the wedge because a prior trend doesn’t quite carry the same bearing on the formation.

US Dollar via ‘DXY’ Four-Hour Chart: Expansion in Price Action Since February

us dollar four hour chart

Chart prepared by James Stanley

The past two weeks have seen a series of higher-lows show-up in the Greenback within that pattern of expansion. When coupled with yesterday’s test above short-term resistance, this further points to the possibility of some short-term strength.

US Dollar: Short-Term Strength Potential From Higher-Lows, Longer-Term Resistance (in Red)

us dollar four hour chart

Chart prepared by James Stanley

EUR/USD Continues Back-and-Forth, Longer-Term Trend-line Nearing

EUR/USD has been in a range-like pattern for most of the past seven weeks. It might not have seemed like much of a range on short-term charts, as those visits to support and resistance came with some rather clear momentum; but on net, back-and-forth is what we have. The levels that we’ve been following for the past month have continued to hold up, and we’re currently seeing some short-term resistance develop around the prior support area of 1.2281, and this comes after yesterday’s resistance at 1.2335-1.2350.

EUR/USD Four-Hour Chart

eurusd four hour chart

Chart prepared by James Stanley

The big question around EUR/USD is that longer-term trend, and what might happen upon a re-test of the 2017 bullish trend-line in the pair. That trend-line currently projects just a bit above the 1.2167 Fibonacci level that has twice helped to catch support in 2018; first in January and then again on the first day of March. Support showing in this region opens the door for bullish continuation strategies.

If you’re looking for short-term indicators around EUR/USD, check out our IG Client Sentiment Indicator.

EUR/USD Daily Chart: Support Potential Around 2017 Bullish Trend-Line

eurusd daily chart

Chart prepared by James Stanley

USD/JPY Continues to Tangle with Long-Term Support

USD/JPY is very interesting for short-side USD scenarios; but that theme has largely been scuttled over the past month-and-change as some longer-term areas of support have come into play. In mid-February, price action ran into the support side of a multi-year symmetrical wedge, and since then bears haven’t been able to make much ground. A bit of secondary support has shown up at the 23.6% Fibonacci retracement of the 2015-2016 major move.

USD/JPY Weekly Chart: Longer-Term Support Holds the Lows

usdjpy weekly chart

Chart prepared by James Stanley

Timing a break of a longer-term support level can be trying for a trader’s patience. But these longer-term themes often have numerous shorter-term scenarios to work through, much as we’re seeing around the backdrop in the US Dollar right now. On a shorter-term basis, bears have remained in-action on USD/JPY, helping to produce a series of lower-highs after that trend-line started to come into play in mid-February. This can keep the pair attractive for short-side scenarios, and a revisit to this shorter-term bearish trend-line can open the door for downside plays.

If you’re looking for short-term indicators around USD/JPY, check out our IG Client Sentiment Indicator.

USD/JPY Four-Hour Chart: Lower-Highs After Long-Term Support Has Come Into Play

usdjpy four hour chart

Chart prepared by James Stanley

GBP/USD – Are the Bulls on Return? BoE on Deck for Tomorrow

Cable will remain in the cross-fire after today’s rate decision as the Bank of England has their own rate meeting on the schedule for tomorrow. Expectations for any actual changes are extremely low, as the BoE has a pattern of only making big announcements at ‘Super Thursday’ events. We had one of those in February, and the next is not until May; so the big question here is whether the BoE is going to start prepping market participants for a move-higher in a few months.

Already on the week, the British Pound has seen a mixed bag of drivers. The week opened with strength on the back of news of a Brexit transition deal between the EU and the UK; and yesterday saw a negative driver when February inflation came-in at 2.7%, a hair below the 2.8% expectation. But – that hasn’t stopped Sterling bulls, as a quick visit to support after yesterday’s inflation data brought upon a bullish response in the pair as prices moved back towards prior highs.

The big question around GBP/USD is similar to what we looked at in EUR/USD in regards to the longer-term trend. Cable has been in a bullish channel for over a year now, and a bearish trend-line showed up in January and February as that bullish trend took a break. But – we broke above that retracement trend-line last week, and this was followed by a move back-above 1.4000.

If you’re looking for short-term indicators around GBP/USD, check out our IG Client Sentiment Indicator.

GBP/USD Four-Hour Chart: Bullish Channel Breaks Above Bearish Trend-Line

gbpusd four hour chart

Chart prepared by James Stanley

This gives the appearance that the longer-term up-trend may be ready for continuation, at least to a greater degree than what we saw in EUR/USD above. For short-side USD strategies going into today’s FOMC meeting, GBP/USD will likely remain as one of the more attractive candidates.

GBP/USD Daily Chart: Bulls Return to the British Pound

gbpusd daily chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on Gold prices? Our DailyFX Forecasts for Q1 have a section specifically for Gold. We also offer a plethora of resources on our Gold page, and traders can stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

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