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US Dollar Rallies, Stocks Pullback Ahead of FOMC Minutes

US Dollar Rallies, Stocks Pullback Ahead of FOMC Minutes

2018-10-17 14:00:00
James Stanley, Strategist
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US Dollar Talking Points:

- After setting a fresh October low while testing a key area of support yesterday morning, the US Dollar has jumped back towards the 95.50 level. This has helped to bring both EUR/USD and GBP/USD back to key levels of support that were looked at last week. Today at 2:00 PM ET marks the release of FOMC meeting minutes from the bank’s September rate decision.

- Global stocks have pulled back a bit after yesterday’s recovery rally. Equity markets are still not yet out of the woods, as there is a mere one day of strength following a rather pronounced sell-off last week; but today could be key for a return of bullish themes as buyers are faced with whether or not to provide support as prices pullback from yesterday’s topside rip. If there is an element of defense at higher-low support, the door remains open for bullish continuation, as has been the case since the Q3 open. But – if buyers can’t defend the lows and if selling pressure does produce a deeper move, the threat of continued risk aversion will remain.

- 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 Stocks Pullback from Yesterday’s Ramp; EUR/USD, GBP/USD Test Support

Stocks are seeing a bit of a pullback after yesterday’s rally, and this comes alongside a spike in the US Dollar after the currency tested below the psychological level of 95.00 yesterday. This has many on the edge of their seats, as another wave of weakness in stocks to threaten last week’s lows could bring on the potential for a deeper, elongated theme of risk aversion. At this stage, last week’s sell-off can be dismissed as a pullback in what had become overbought topside trends. But if we do see sellers come back to hit the offer with aggression, as we had seen through the early portion of last week, fear will permeate the atmosphere as a number of headline themes will move under the microscope.

That scenario is not quite here yet as the backdrop isn’t all doom-and-gloom. Last quarter produced robust gains across US equities, and just a couple of weeks into Q4 and we’ve seen a portion of those gains given back. But, at this stage, the bullish long-term backdrop remains across US equities, and the return of strength yesterday carries with it the potential for topside continuation as we move towards the end of the year.

In US stocks, the big question is whether bulls defend higher-low support after yesterday’s rip. To put this move into context, the Daily chart of the Dow Jones is below, with focus on the support level that helped to arrest the declines late last week, as was discussed in this week’s technical forecast for global equities.

Dow Jones Daily Price Chart

Dow Jones Daily Price Chart DJIA DJI

Chart prepared by James Stanley

Going down to shorter-term charts can help to produce support structure for strategies around bullish continuation. A series of prior resistance swings may be of assistance, as could a bullish trend-line that can be found by connecting the Thursday and Monday swing lows. This sets up a fairly big spot around the 25,500 area on the charts; and if prices do break-below the Fibonacci level at 25,328, the prospect of a return of bearish price action will look considerably more likely with a re-test of 25k as the next step.

Dow Jones Hourly Price Chart: Near-Term Support Structure, Will Bulls Defend the Lows?

Dow Jones Two Hour Price Chart

Chart prepared by James Stanley

US Dollar Jumps After Yesterday’s Test Below 95.00

Yesterday’s US open was marked with a quick run of USD-weakness as the currency tested fresh October lows. This took place around the key level of 95.00 on DXY, which has retained a frequent role in USD price action since that level helped to mark the monthly high in May of this year. Since then, there has been considerable churn and a number of pensive themes, but prices have continued to sputter around this level.

Yesterday’s quick test below 95.00 was marked by a return of strength, and prices are now trading at fresh weekly highs in DXY. Prices are fast nearing the 95.53 level that’s also had a tendency to impact near-term price action in the Dollar, and this could be an area of interest for profit taking on bullish approaches or resistance potential for bearish short-term reversals.

US Dollar Two-Hour Price Chart

us dollar usd two hour price chart

Chart prepared by James Stanley

EUR/USD Re-Encounters 1.1530

Going along with that spike of US Dollar strength is a support test in EUR/USD. This comes at a big level as 1.1530 has continued to play a role in EUR/USD price action. This level helped to mark the lows in the pair for a large portion of Q2 and Q3. This was only taken-out when risk was growing around the situation in Turkey in early-August, compelling a run of risk aversion that crafted a fresh yearly low in the pair. But – as markets took a step back from the proverbial ledge, EUR/USD pushed back above 1.1500 and in short-order 1.1530 was back as support in the pair. This happened in late-August and twice in September; and then in early-October it even helped to show short-term resistance again after prices pushed back above (and then helped to craft support, yet again, last week).

EUR/USD Eight-Hour Price Chart

eurusd eur/usd eight hour price chart

Chart prepared by James Stanley

GBP/USD Back to 1.3100

Going along with the above two themes, GBP/USD is in the midst of a pullback with prices re-testing this week’s open, which also happens to be this week’s low. This comes in at 1.3098, and this was the level that was in last week’s article in the search of higher-low support in the pair. ‘Consistency’ and ‘Cable’ aren’t terms that go together very well at the moment, so traders would likely want to continue to move-forward with heavy caution, but the bullish backdrop that has been building in the pair for almost two months now remains, and this can keep the door open for bullish strategies in GBP/USD.

GBP/USD Four-Hour Price Chart

gbpusd gbp/usd four 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 Q4 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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