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US Dollar Bounces From Fibonacci Support Ahead of Powell Testimony

US Dollar Bounces From Fibonacci Support Ahead of Powell Testimony

2018-07-17 13:30:00
James Stanley, Currency Strategist
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Talking Points:

- The US Dollar caught a bid earlier this morning, and prices are bouncing from the 94.30 level which is also the 38.2% retracement of the down-trend that started last year. This has helped to drive EUR/USD deeper into the digestion formation that’s been building over the past month, and GBP/USD is nearing a re-test of a key Fibonacci level at 1.3117.

- The next two days bring the twice-annual Humphrey Hawkins testimony from the FOMC Chair to Congress. Today at 10AM ET, Chair Powell will testify in front of the Senate Finance Committee and tomorrow at the same time he will speak in front of the House of Representatives Financial Services Committee. The big question is what Mr. Powell and the Federal Reserve might think about the flattening US Treasury Yield Curve that’s beginning to garner more attention across global markets.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re 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.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

US Dollar Bounces From Fibonacci Support Ahead of Powell Testimony

The next two days bring a rather large driver to the fray for US markets. FOMC Chair Jerome Powell testifies in front of the Senate Finance Committee today as part of the FOMC’s twice-a-year Humphrey Hawkins testimony. Tomorrow will see Chair Powell continue in front of the House Financial Services Committee. The testimony will begin with prepared remarks from Mr. Powell with an update on the economy, and this will be followed by questions from Congressional representatives that can span a wide range of topics.

The big question being asked by markets is what Mr. Powell and the FOMC at-large might think about the flattening US yield curve that’s beginning to garner more attention across global markets. Positive slope in a yield curve is often looked at as a sign of confidence towards future economic conditions, acknowledged by the fact that the return is higher on longer-dated bonds to compensate for the additional time risk. But – when there is little to no premium to hold a debt security for a longer period of time, something is amiss, and this can be a negative sign towards future economic conditions as market participants are willing to accept a similar or lower-yielding (in the case of an inverted yield curve) asset with a longer-term risk profile just for the safety of being invested in a US treasury instrument.

As we looked at yesterday, the Dollar started to pullback last Friday and that theme continued into this week’s trade. Prices ran as deep as 94.30, at which point buyers stepped in and price action began to bounce. The price of 94.30 is the 38.2% Fibonacci retracement of the bearish trend that started last year, and this is the topside of the zone that we’ve been following that runs from 94.20-94.30.

US Dollar Four-Hour Price Chart: Bounce From Fibonacci Support Ahead of Powell Testimony

US Dollar Four-Hour Price Chart

Chart prepared by James Stanley

On a shorter-term basis, traders are likely going to want to be careful of chasing the move higher with such a big driver on the economic calendar for the next couple of days. From the hourly chart below, we can see where this support bounce has led into a test of short-term resistance, as taken from a group of prior swing-highs from last week around 94.70-94.80, and we can combine this with the fact that DXY has had difficulty maintaining strength above the 95.00 level after the currency put in a double-top in the final two weeks of Q2.

US Dollar via ‘DXY’ Hourly Price Chart: Short-Term Resistance Test After Fibo Support Bounce

US Dollar Hourly Price Chart

Chart prepared by James Stanley

EUR/USD Holds Resistance in Key Zone, Builds Deeper into Symmetrical Wedge

In EUR/USD, prices are continuing to narrow within a symmetrical wedge pattern that’s been building since mid-June, and price action is right in the middle of the zone that we’ve been following that runs from 1.1685-1.1736. This leaves the pair in a rather direction-less format on an intermediate-term basis, and traders looking to build a position would likely want to wait for prices to break in one direction or the other before looking to impose trending strategies.

A break below last week’s swing-low of 1.1611 opens the door for a re-test of the double-bottom at 1.1509, at which point bearish breakouts become of interest on a possible bearish break-below 1.1500. On the bullish side of the pair, a break above the July swing-high of 1.1791 opens the door for a re-test of the June high at 1.1852. This bullish scenario would likely come along with a bearish break in the US Dollar, at which point DXY would have the deeper support zone that runs from 93.20-93.30 to contend with.

EUR/USD Four-Hour Price Chart: Breakout Potential as Prices Narrow Deeper into Digestion

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

On a longer-term basis, and when taken with the prior bearish trend, this symmetrical wedge/triangle makes up a bear pennant formation. This would add a possible bias to the above digestion, and this would also highlight bearish potential should prices pose a re-test of the low around 1.1509.

EUR/USD Daily Price Chart: Bear Pennant Formation Highlights Bearish Potential Sub 1.1500

eur/usd eurusd daily price chart

Chart prepared by James Stanley

The British Pound is Backing Down – Watch Support at 1.3117

It’s been another sell-off in the British currency as Brexit dynamics continue to populate the headline, dragging the Pound along for the ride. Despite the fact that we’ve seen building expectations for a near-term rate hike out of the BoE, strength in the currency has been more than obscured by risk as the UK nears a showdown with the EU in just a few short months, and very little else appears certain.

We’d looked into the British Pound yesterday, urging caution from chasing the early-week strength. With prices breaking back-below the 1.3200-handle, the big question is whether we see another bounce at the Fibonacci level of 1.3117. We’ve already seen three bounces from this area over the past month, and if buyers can’t hold the lows on a recurrent test, the door is opened for a drop down to the 1.3000 psychological level, and that can make an interesting case for bullish reversal potential.

GBP/USD Daily Price Chart: Will Fibonacci Support Be Able to Hold Through a Fourth Test?

gbpusd gbp/usd daily price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also 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

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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