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US Dollar Gives Back Breakout Gains Ahead of FOMC

US Dollar Gives Back Breakout Gains Ahead of FOMC

James Stanley, Senior Strategist

US Dollar Talking Points:

- The US Dollar has continued to drop following last week’s bullish breakout, further giving back prior gains ahead of today’s FOMC rate decision. The Dollar broke-out last week despite a recent backdrop of falling rate expectations in the United States, with markets now showing an approximate 65.5% chance of at least one FOMC rate cut by the end of the year.

- The remainder of this week brings additional items of interest on the economic calendar, with highlights around tomorrow’s Bank of England ‘Super Thursday’ rate decision, and the Friday release of Non-Farm Payrolls out of the US. This can keep the US Dollar in the spotlight into the week end.

- DailyFX Forecasts are published on a variety of currencies such as the US Dollar or the Euroand 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 Drop Continues Ahead of FOMC

The next few days should be especially busy across global markets. In the US, corporates continue to release quarterly earnings and later this afternoon, the Federal Reserve announces their May rate decision. This will be followed by a press conference and as has become usual, the content here is likely what will drive the moves.

There is little expectation for any actual moves today, with only an approximate 2.5% probability of a 25-basis point cut. The bigger question is for later in the year, and forecasts are considerably more open for rate cuts down the road. For the December rate decision, there is a 65.5% chance of getting at least one rate cut, and there’s a 24.7% probability of getting at least two cuts or 50 basis points of adjustment.

Probabilities for Rate Moves Into December, 2019 FOMC (Per CME Fedwatch)

FOMC Rate Expectations via CME Fedwatch

Data derived via CME Fedwatch

The bigger question for currency traders here is how the US Dollar might respond. The Fed shifted into a more-dovish position at the March rate decision when they released updated forecasts, cutting their prior expectation for two hikes in 2019 down to zero. And this did provide an initial motive of weakness in the US Dollar, as the currency hurriedly pushed down to find support on a bullish trend-line. But, after that, bulls remained in-charge and continued to push the currency higher through the Q2 open.

US Dollar Daily Price Chart

us dollar daily price chart usd

Last week brought fresh 22-month highs in the US Dollar as the currency broke-above an ascending triangle formation. But, that move caught resistance just a couple of days later, and leading into this week, the pullback has continued.

This raises a couple of questions around the USD. First, and perhaps most important, will a more-dovish shift at the Fed bring a weaker US Dollar? Or, is the US currency caught in the cross-fire of global dilemma in which the USD is the ‘best house on a bad block,’ in which the USD might continue to be exposed to gains from deductive moves of weakness in other major currencies, such as the Euro?

On the below Eight-hour price chart are a series of potential support levels to follow for the US Dollar going into today’s rate decision. Last week’s swing low comes-in around 97.25, and a little lower is the April swing-low around 96.78. Below that is the bullish trend-line making up the support side of the ascending triangle, and this nears confluence with the long-term Fibonacci level at 96.47.

US Dollar Eight-Hour Price Chart

us dollar eight hour price chart usd

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q2 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 an abundance 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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