FX Talking Points:
- Today at 2PM ET brings the final FOMC rate decision of 2018, and the wide-expectation is that the bank will pose a ‘dovish hike’. This would mark the fourth rate hike out of the FOMC for this year, and it appears as though the bank may slow down projections for continued rate hikes in 2019 and 2020. The big questions are: How dovish might the Fed be? How concerned is the bank with the recent risk aversion in global equities markets? And is there any concern around the recent build of worries around the leveraged loan market, a problem that could become exacerbated by continued higher rates?
- The US Dollar set a fresh yearly high just last Friday, but it’s been a fairly clear change-of-pace since then as sellers have remained in control. Given the expectation for a dovish FOMC rate hike, combined with the announcement of an EU deal on the Italian budget, there could be additional upside for EUR/USD. The level to watch on the pair for a return of bullish strategies is the 1.1500 psychological level, which makes up the topside of a resistance zone that’s been in-play for most of Q4.
- 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.
Final FOMC Rate Decision of 2018 Brings Wide Expectation for ‘Dovish Hike’
Today brings the final FOMC rate decision of 2018, and the bank is widely-expected to hike rates by 25 basis points to mark the fourth such move of the year. Of recent, growing pessimism around risk markets have helped to modify FOMC verbiage around future rate policy, and it appears as though that assumption of a rate hike today is also coupled with the expectation for a dovish FOMC that can show through forward-looking projections at the bank. But just how dovish might the Fed be? And will this be accompanied by a dovish press conference in which FOMC Chair Powell talks up a ‘wait and see’ approach rather than continued gradual rate hikes? It makes sense for the bank to remain non-committal here while also exuding a bit of confidence given continued strength in both employment and inflation in the US. This leads to the wide expectation for a ‘dovish hike’ at today’s meeting.
The US Dollar has been offered lower throughout this week after nudging up to a fresh yearly high on Friday. Prices have been in retreat in DXY, with sellers pushing the currency back-below the 97.00 level following last week’s return of strength. This sets up a fairly interesting support level that’s already come into play twice this month, and that rests at 96.47, which is the 23.6% Fibonacci retracement of the 2011-2017 major move in the US Dollar.
US Dollar Eight-Hour Price Chart
Chart prepared by James Stanley
US Stocks Grasp For Support
Both the Dow Jones and the S&P 500 continue to cling to support around multi-month lows ahead of this afternoon’s rate decision. The S&P 500 is a touch less attractive given that prices are sitting at 10-month lows, holding on to the swing-point that was set in February before buyers returned into US stocks. That level has been tested twice already, coming into play on Monday during a rough session that saw sellers retain control for most of the period; and then again yesterday after an early-morning rally was stopped-short after the S&P 500 found resistance just under the 88.6% retracement of this year’s major move.
S&P 500 Daily Price Chart: Holding Support Around 2018 Lows
Chart prepared by James Stanley
Dow Jones Holding 88.6% Fibonacci Support
On a comparable basis, the Dow Jones Industrial Average is holding support around the 88.6% Fibonacci retracement of this year’s major move, and this has now held over a three-day period. This can keep the index a bit more attractive for bullish equity plays than the S&P 500 as the blue-chip index hasn’t been hit quite as hard as the more broad-based S&P 500.
DJIA: Dow Jones Daily Price Chart: Holding Support at 88.6% Retracement of 2018 Major Move
Chart prepared by James Stanley
EUR/USD Tests Above 1.1400 as EU Reaches Budget Deal with Italy
Playing into that USD-weakness that’s been fairly visible so far this week is continued strength in EUR/USD following last week’s test below triangle support. As I had warned of in the webinar following the ECB rate decision on Thursday , that could be a difficult move to chase as the pair had displayed a lack of trend for more than a month, and a big zone of potential support lurked just-below. This was reiterated in this week’s FX Setups, as I wanted to see a break below 1.1187 to re-open the door for shorts.
That’s an event that still has yet to happen as the pair remains bound between both longer-term support and resistance. If this afternoon’s FOMC rate decision does bring USD-weakness into the fray, the resistance zone in the pair could quickly come into play. If sellers show-up ahead of a re-test of 1.1500, the door can remain open for short-side strategies. But – if bears are unable to hold resistance in this zone, the pair would be working on fresh 2.5 month highs, and this is something that could re-open the door to bullish strategies in EUR/USD, looking for continued strength into year-end.
There could be a fundamental backdrop to support such a theme of strength, as discussed by our own Martin Essex earlier this morning. The EU has reached a budget deal with the Italian government, helping to address one of the chief concerns around the Euro-Zone economy as 2019 nears.
EUR/USD Daily Price Chart: Nearing Monthly Highs
Chart prepared by James Stanley
GBP/USD Holds Fibonacci Resistance Again, Beware Bear Traps
GBP/USD was taken for a wild ride last week around Brexit dynamics, and those themes have calmed this week as other items have come into the spotlight. At this point, it appears as though PM May is ready to setup the Brexit vote in UK Parliament for the week of January 14th. Price action in GBP/USD has remained of interest as the prior yearly low, as taken from a key Fibonacci level, has continued to help hold resistance in the pair.
But, as I shared in yesterday’s webinar, that may not last for as buyers are getting a bit more aggressive on both near-term highs and short-term lows. This doesn’t necessarily eliminate the prospect of longer-term bearish strategies; but given the deep oversold nature of the pair last week, there may be more topside in the move before sellers are ready to come back to continue the down-trend. Deeper resistance potential remains around the 1.2750 psychological level. A topside break-above 1.2850 would bring to question the bearish trend, and the viability of continued short-side stances going into year-end.
GBP/USD Four-Hour Price Chart
Chart prepared by James Stanley
USD/JPY Fresh Monthly Low as Prices Test Below Key Support
On the short-side of the US Dollar, I started to look at USD/JPY coming into this week, and the pair has already posed a fast push down to a key support level around 112.34, which was the initial target on the setup. That support is being tested through after a persistent effort from sellers to break-through; but if USD-weakness is the takeaway from today’s FOMC rate decision, the short-side of the pair could continue to show promise. Deeper support potential exists around 111.64, 110.86 and then the psychological level around 110.00.
USD/JPY Four-Hour Price Chart: Fresh Seven-Week Lows
Chart prepared by James Stanley
AUD/USD Holds Resistance at Prior Support
On the side of USD-strength, AUD/USD could be interesting. The pair has displayed bearish tendencies this month after a very strong month of November, and a key support zone in the pair has now come back as short-term resistance. This zone runs between two long-term Fibonacci levels, with the price of .7185 functioning as the 61.8% retracement of the 2001-2011 major move; and the level of .7205 as the 76.4% retracement of the 2008-2011 bullish run in the pair.
This zone on the chart came back into play in early-November as support; and after last week’s re-test of this zone built into a bear flag formation that was followed by a down-side break to fresh lows, it’s now helping to cauterize resistance in the pair.
For USD-strength strategies, this remains a setup of interest as the end of 2018 nears.
AUD/USD Eight-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
