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US Dollar Price Action In the Spotlight As Jackson Hole Begins

US Dollar Price Action In the Spotlight As Jackson Hole Begins

2018-08-24 13:32:00
James Stanley, Currency Strategist
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Talking Points:

- The Jackson Hole Economic Symposium is now underway and there have been multiple Central Banker interviews already on financial television. Today is marked by a series of speeches and interviews and this produces a backdrop that could bring continued volatility throughout the day. Potentially complicating matters for short-term traders is the fact that we’re in the latter-portion of summer trading and liquidity levels will likely remain subpar throughout the day, potentially magnifying any volatility that does come in from today’s slate at Jackson Hole.

- The US Dollar is very much the focal point today after the retracement that started last Wednesday ran into a key area of support yesterday. That support has held thus far, but also brewing on the weekly chart is a potential bearish reversal pattern, which if coupled with a break or test through support today, can become attractive for price action themes next week and moving towards the end of Q3.

- 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.

Jackson Hole Begins as We Near the Week’s End

As we move towards the close of this week, one really big event remains on the calendar, and that’s the start of the Jackson Hole Economic Symposium. Today will be marked by a series of interviews from Central Bankers attending the event, so the potential for volatility remains high throughout today’s session. At 10AM ET, FOMC Chair Jerome Powell will give a speech to discuss the US economy and Monetary Policy. Naturally, questions around rate policy will be at the forefront of traders’ minds as this gets underway, but also of interest is how the Fed chief might frame his response towards the comments from President Trump earlier in the week. While many headlines have appeared to pit the two at odds with each other, the question remains how well they can synergize monetary and fiscal policy to achieve the long-term goals for the US economy.

Mr. Powell, in charge of monetary policy, is likely looking at a backdrop for continued rate hikes in order to tame inflation closer to the Fed’s 2% goal. President Trump, on the other hand, has pointed out the primary risk of the Fed’s strategy, which if coupled with a global environment of dovishness, much as we have today, could see the US Dollar continue to surge up to fresh highs. If left unchecked for long enough, this could temper inflation too much, putting the US in the unenviable position of watching a strong currency erode growth to the point where rate cuts need to be addressed. This is not the type of stable policy that’s desired around interest rates; and this concern is similar to what happened to Japan after the Plaza Accord helped to bring upon the ‘lost decades’ for the economy, and this is a theme that the Bank of Japan continues to struggle with.

Ahead of Mr. Powell’s speech, the US Dollar continues to hold on to the bullish up-trend that’s defined the currency’s price action over the past four months. That bullish move in the Greenback started in mid-April, right around the time that British inflation was starting to head-lower. A week later, a really dovish ECB sent EUR/USD reeling-lower, and that further contributed to the US Dollar’s rise. Once we got into the month of May, worries around the political situation in Italy drove even more sellers to the pair (and buyers to USD), and this is when the bulk of the topside move was priced-in. After that, we had almost two months of digestion until the breakout two weeks ago:

US Dollar Daily Price Chart: Higher-Low Support After Bulls Return

us dollar four hour price chart usd

Chart prepared by James Stanley

That bullish breakout lasted for a little under a week; but starting last Wednesday, prices began to pullback, and didn’t really stop until the psychological level of 95.00 came into play on Wednesday. Yesterday saw prices bounce from support, but buyers haven’t had much additional motivation since yesterday’s US close, and already that move is pulling back.

But – as we looked at in yesterday’s webinar, the US Dollar does still have that short-term pattern of higher-highs and higher-lows, alluding to the potential alignment of both short and long-term themes in the currency ahead of Mr. Powell’s speech later today.

US Dollar Hourly Price Chart: Higher-Highs, Lows After Support Test at 95.00

us dollar usd hourly price chart

Chart prepared by James Stanley

The Alternative Case for USD

Given the drivers that we have ahead of us with Jackson Hole, traders would likely want to entertain alternative scenarios around the US Dollar, and we started to look into one this week as the potential for a bigger-picture USD correction has started to rise. This comes from the weekly price chart, and incorporates a couple of key swing points already seen so far this year.

In February, the low in the US Dollar was marked by the 50% retracement of the 2011-2017 major move. The 23.6% Fibonacci retracement of that same study came into play last week at 96.47, and this is the point where USD bulls started to face turbulence. After last Wednesday’s reversal, and this week’s weakness, we now have a non-completed evening star formation showing on the weekly chart.

As we discussed in yesterday’s webinar, if the US Dollar is able to fall through this support ahead of the week’s end, that evening star formation will look very attractive for trading bearish continuation in the US Dollar. For now, price action remains bullish; but a break of support ahead of this week’s close can change that picture very quickly.

US Dollar Weekly Price Chart: Non-Completed Evening Star At Fibonacci Resistance

us dollar usd weekly price chart

Chart prepared by James Stanley

EUR/USD Re-Tests Resistance After a Very Strong Showing - Turkish Markets Re-Open Next Week

What really seemed to send the Euro spiraling earlier in the month was fear around contagion from the situation that’s still developing in Turkey. Turkish markets were closed this week, so that theme wasn’t quite front-and-center over the past few days, but they re-open next week and we may not have seen the end of that worry.

This week saw EUR/USD retrace a large portion of those prior losses as price action pulled back to earlier August resistance. This was the ‘R3’ zone of resistance that we were looking at for bearish EUR/USD scenarios earlier this week, and as we move towards the end of this week, that potential remains as lower-high resistance has continued to hold.

EUR/USD Four-Hour Price Chart: V-Shaped Reversal into Prior August Resistance

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

GBP/USD Drives Deeper into Symmetrical Wedge

GBP/USD ran into a big Fibonacci level last week, and this finally provided a bit of support after a very bearish start to the month of August. We previously looked at short-side setups off of a zone of resistance at 1.2817-1.2846, and coming into this week we looked at top-side plays re-employing that prior resistance zone as a bullish target. Prices caught resistance in our ‘r2’ zone on Wednesday, and are now finding support around prior resistance.

At this stage, we have a building symmetrical wedge pattern after bears drove prices lower for the past four months. This indicates digestion; but given the backdrop it can also be taken with a short-side bias given the fact that we’re nearing Brexit negotiations between the EU and UK, and the Bank of England appears nowhere near another rate hike anytime soon.

GBP/USD Four-Hour Price Chart: Digestion After Bears Ran into Fibonacci Support

gbpusd gbp/usd four hour price chart

Chart prepared by James Stanley

The one backdrop that could make the topside of GBP/USD attractive at the moment would likely need to be driven by USD weakness, as we looked at above in the alternative scenario. And if that’s the case, there are likely much greener pastures out there to look for a return of last year’s US Dollar weakness.

This can help to keep focus on resistance, which we’re currently taking from the ‘r2’ zone that we looked at to start this week. Should bears hold resistance to lower-highs upon re-tests of this area, the door could soon re-open for bearish continuation setups in the pair, looking for GBP/USD prices to re-test the yearly low that was set last week.

GBP/USD Hourly Price Chart: Can Cable Bears Re-Emerge To Push Down to Fresh Lows?

gbpusd hourly price chart gbp/usd

Chart prepared by James Stanley

Yen Weakness Extends After Japan CPI Disappoints

Another theme that’s getting some attention is Yen weakness to go along with continued lackluster inflation in Japan.

Earlier in the year, a spike in inflation brought along fears that the BoJ may soon find themselves in an ECB-like scenario from last year. This of course is when rising inflation brought upon the idea that the ECB would be forced away from stimulus and, eventually, towards rate hikes.

Around the ECB this year, that theme has fizzled as inflation fell and the bank was able to go more dovish, even when announcing stimulus taper. But earlier in the year around the Bank of Japan, that theme was rather pronounced as inflation was jumping higher. That led to a fairly strong Japanese Yen throughout Q1 as prior bets of Yen-weakness unwound for fear of higher inflation forcing the bank away from their massive stimulus program.

That theme took a backseat in Q2 as inflation fell back-below 1%. Yen weakness soon returned as expectations for the Bank of Japan to remain loose and dovish drove prices.

USD/JPY Daily Price Chart: Q1 Strength Leads to Q2 Weakness, Q3 Remains Undefined

usdjpy usd/jpy weekly price chart

Chart prepared by James Stanley

But more recently, grumbling has started to show that the BoJ may not be as passive as we thought. Reports indicated that given that earlier-year spike in inflation, the Bank of Japan had planned as many as two interest rate adjustments this year. And when the BoJ re-worked their stimulus program earlier in August, questions abound about motive, whether they were doing it to open the door to more loose monetary policy or less?

The net response across markets was one of indecision as the Yen balanced the forces of risk aversion (Yen strength) and BoJ policy (Yen weakness). Last night brought the most recent data point on the inflation front, and we saw yet another disappointing print as headline inflation came in at .9% versus the 1% expectation. But – we are seeing some element of continued growth after the pullback to .6% in April. May and June printed at .7% and July at .9%, so we do have the potential for continued gains in this data point.

Japan Inflation: Growing After Earlier-Year Spike Pulled Back in Q2

Japan inflation since July, 2017

Chart prepared by James Stanley

Last night’s disappointing inflation print opened the door for some additional Yen weakness. But, the fact that inflation is continuing to grow is something that keeps the prospect of Yen strength on the cards, particularly if that theme of stronger Japanese inflation is coupled with continued risk aversion, as could be seen around the scenario that continues to revolve around Turkey.

USD/JPY Weekly Price Chart: Near Resistance of a Long-Term Symmetrical Wedge

usdjpy weekly 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 Q3 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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