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Forex Talking Points:

- The US Dollar is holding onto strength as we wind down the final two days of Q3, but this may not be what you think: We did have a Federal Reserve rate decision yesterday, and the Fed did hike rates while making what could be considered a hawkish move by removing the word ‘accommodative’ from the statement in reference to monetary policy. But – the timing of this morning’s move does not sync with that, as Dollar-strength showed-up shortly ahead of the Euro open, and not coincidentally, we also saw a fresh round of worry as Italian politics moves back towards center-stage. As of now, the US Dollar has held near-term resistance at the Q3 open price of 94.63, and this is a level we looked at in Tuesday’s webinar.

- The Dollar was very strong in April and May, breaking the 14-month down-trend that had erased as much as -15% of the Greenback’s value. This was largely emanating from risk aversion as investors grew more cautious around Europe on the basis of political volatility in Italy. That theme has come back to light as the Italian government nears a key budget meeting. The big question is whether the government proposes a growth-friendly budget, as was a key campaign point in the recent elections; or whether we see a budget making a shift towards austerity in a move that would likely please Brussels. Reports that this budget meeting may be delayed this morning appeared to kick off the risk aversion, so this is a more likely source for that USD and EUR/USD move that we’ve seen over the past 24 hours.

- 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 Breaks Out Ahead of Euro Open, Resistance at the Q3/July Open

The US Dollar is holding on to gains as we move into the final two trading days of Q3. And given that we had a rate hike yesterday, it might be simple to associate this move with that rate decision, but one look at the chart indicates that’s probably not the case. The US Dollar held resistance at the weekly highs into this morning, putting in a topside move around 1 AM ET, just ahead of the European open. US Dollar prices quickly ran-up to the Q3 open price that we looked at yesterday of 94.63, and that has since held as resistance.

US Dollar Hourly Price Chart: Strength Ahead of Euro Open, Resistance at Q3 Open of 94.63

us dollar usd hourly price chart

Chart prepared by James Stanley

Motive could be important here, however, as this was a big sticking point for USD in Q3. With hindsight, it’s become apparent that risk aversion was probably the biggest culprit behind the US Dollar’s bullish run in April and May, largely driven by worries around Italian politics and a potential debt stand-off in the Euro-Zone. This really began to show prominently in the month of May, and this is when USD put in its strongest performance in well-over a year. After that, Dollar bulls had a rough time save for a two-week period in early-August when risk aversion began to show from another theme, and that was fear around contagion in European banking from exposure to Turkey.

But as those fears receded behind the headlines from mid-August and on, the US Dollar started to drop, similar to what we saw in the 2017-2018 bearish trend when sellers continued to persist. And that’s largely lasted into the end of Q3, with this fresh flicker of strength showing as we move to wind down the quarter. This doesn’t necessarily obviate the bearish stance in the currency, but this is something to keep a watchful eye on as we move into Q4.

US Dollar Four-Hour Price Chart: Bearish Trend Remains Intact

us dollar usd four hour price chart

Chart prepared by James Stanley

Euro: Italian Budget the Focus

Italian politics have come back into focus as the recently-installed government nears a key budget meeting, and this is likely a larger motivator for that topside move in US Dollar price action than yesterday’s FOMC rate decision.

This morning was supposed to bring an Italian budget meeting, but reports began to circulate that this meeting was delayed – and this appears to be the source of the Euro weakness and Dollar strength that have shown over the past few hours. The variance across media reports around that scenario is fairly wide, so it’s difficult to know what’s what at this point, but the center of the discussion revolves around whether the country goes for a larger budget deficit in order to push growth-friendly policies or whether they make a move towards austerity that would likely be more pleasing to the ECB, and Germany.

Reports have even begun to indicate that the row has grown to such a level that Italian Economy Minister Giovanni Tria ‘was ready to leave,’ as reported by the Italian daily La Stampa earlier today. So, again, this is very early, and it’s difficult to know what’s actually happening here as we only have innuendo as reported in the press, but markets have started to incorporate at least some additional risk around the matter.

EUR/USD dropped to and found support off of a key level this morning, taking place around 1.1685. This is the 23.6% Fibonacci retracement of the 2008-2017 major move in the pair and this, so far, has been able to hold the lows. And as we looked at yesterday, there is another level of interest just below current prices at 1.1651, as this was the Q3 open in the pair.

EUR/USD Four-Hour Price Chart: Support Shows at 23.6% Retracement of 2008-2017 Major Move

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

Risk Aversion Tendencies Ahead of Q3 Close

One thing that did come from that FOMC rate decision was an uptick in risk aversion, as US stocks sold-off into the close and we even saw a bit of Yen-strength, which has started to give back over the past few hours. This could be something to watch today as we move into Quarter-End, as a continuation of Yen-weakness could be seen as a sign of market confidence. At this stage, we still have yet to see confirmed signs of recovery in the pair after yesterday’s FOMC-fueled trend-line break.

USD/JPY Two-Hour Price Chart: Attempting to Recover After FOMC-Fueled Trend-Line Break

usdjpy usd/jpy two hour price chart

Chart prepared by James Stanley

This quick show of Yen-strength has pulled-back that bullish breakout that’s continued to hold in EUR/JPY, and the support zone that we’ve been following for this week has now come into play. This presents a pretty interesting way to fade this recent bout of risk aversion, as the prior forces of trend coming back into play, with Euro strength and Yen-weakness, should help the pair to recover back towards prior highs around 133.00.

EUR/JPY Eight-Hour Price Chart: Pulls Back to, Finds Support in Key Zone of Prior Resistance

eurjpy eur/jpy eight hour price chart

Chart prepared by James Stanley

Stocks Pull Back After FOMC, S&P 500 Tests Q3 Bullish Trend-Line

One area that did show a bit of pressure around yesterday’s FOMC rate decision was US equities. Stocks pulled back and sold-off into the close, with the S&P 500 moving down to find support at a key bullish trend-line that’s held the lows for the entirety of Q3.

S&P 500 Four-Hour Price Chart: Trend-Line Holds the Lows Through Q3, Back into Play

spx 500 four hour price chart spy es

Chart prepared by James Stanley

The Dow Jones, however, doesn’t look as optimistic, at least not at this point. As we wrote yesterday, deeper support potential exists here, and we’re currently seeing Dow futures show resistance around an area of prior support. So we may be in for a deeper drop here, and there are support zones around 26,217-26,260 and then again around 26k that could be operable for bullish continuation approaches.

Dow Jones Two-Hour Price Chart: Deeper Pullback Potential

Dow Jones DJIA DIA two hour 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