US Dollar Talking Points:
- It’s been a messy second-half of the week across global markets following the FOMC rate decision. The Fed cut rates but remained evasive about future policy moves. This has left markets to their own devices in attempting to factor odds for future cuts at nearby rate decisions.
- The FOMC rate decision produced a net move of strength in the Greenback when the Fed cut rates; but that move has been almost entirely faded-out at this point as a disappointing ISM release yesterday was followed by news of more tariffs on China. Perhaps not coincidentally, those additional Chinese tariffs might put the Fed in a more-dovish position for September; and odds for a cut at that next FOMC rate meeting have went from 50/50 yesterday back up to 93.5%.
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FOMC Leaves a Number of Questions to be Answered
For investors or traders coming into this week looking for clarity – better luck next week. As global markets look to close what’s been a busy showing on the charts, a number of possible drivers remain but it appears as though few market participants know which of those to focus on. The early-week BoJ rate decision saw the bank tap dance ahead of the Fed, and that’s where the confusion really started as the FOMC cut rates for the first time in a decade and the US Dollar rallied up to a fresh two-year-high.
While this is counter to what one might expect when a Central Bank cuts rates, the backdrop with which it took place helps it to make a little more sense. A 25 basis point cut was already well priced-in and markets were, in fact, looking for hints towards more from the Fed in the remainder of the year. Those hints never showed and this left market participants to their own devices. Odds for future cuts narrowed at the FOMC meeting, with September moving down to a 50/50 chance of another 25 basis point cut.
But perhaps more importantly, markets have continued to try to read the tea leaves in determining just how dovish the Fed might be moving forward, in essence, trying to factor in rate cut probability on the basis of data flow. That led into yesterday’s ISM report, which disappointed, and that brought a bit of USD-weakness on to the table. Then yesterday’s announcement from the White House that more tariffs were going to be levied on Chinese goods, at which point the Greenback got slammed back-below the 98.33 level that had previously functioned as the yearly-high. And that led into this morning’s NFP report.
The net of this week’s price action in the US Dollar has been an inverted hammer. There’s still time until the close and this could certainly change but, if price action closes in this manner it’s not an encouraging sign for US Dollar bulls. An inverted hammer printing at the top of an up-trend can be called a ‘shooting star’ formation, highlighting future reversal potential.
US Dollar Weekly Price Chart
As discussed in yesterday’s webinar, there are a few different areas of interest for short-side USD strategies. USD/JPY put in a gnarly day of price action on Thursday around the news of more tariffs on China, exposing additional ‘flight-to-quality’ drives into the Yen.
USD/JPY has continued to dive ever since, rushing down to a fresh seven-month-low and testing below the 107.00 handle. This can keep the door open for short-side scenarios going into next week.
USD/JPY Weekly Price Chart
Also coming into view and possibly of interest for those looking to take on a short-side stance in the US Dollar, NZD/USD has just run into a big zone of support around the .6500 handle. This is the same batch of prices that held the lows in the pair in May and June of this year and, at the very least could offer concentrated risk for reversal setups with stops investigated below the recent lows.
NZD/USD Daily Price Chart
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or 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.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX