US Dollar Price Action Pre-FOMC: GBP/USD, AUD/USD, USD/JPY
FOMC, US Dollar, EUR/USD, GBP/USD, USD/CAD, USD/JPY Talking Points:
- Tomorrow brings the March FOMC rate decision, but the large focus will be on the dots as the Fed’s updated forecasts will highlight their current plans for future policy.
- Rates have shot-higher so far in 2021, driven by optimism around the continued recovery. This seemingly flies in the face of the Fed’s stance, remaining pedal-to-the-floor on accommodation. But how will this reconcile, and what might the Fed be planning for next?
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
We are here, finally at a FOMC rate decision that matters where something might actually happen. To be sure, there are no expectations for rates to actually change. But, the forecast for how those rates might eventually get nudged is of high importance after markets have been driven by cheap money policies for the past year.
In the US Dollar, those cheap money policies drove in quite the bearish trend last year as the USD collapsed by as much as 13.38% from the March high down to the Jan 2021 low. But, since that low was set in January the Dollar has been on a bullish track, continuing to claw back 2020 losses as rates markets have went awry in trying to get ahead of the Fed’s tightening. As shown in the webinar, so far in 2021 the rate on the 10-year Treasury note has risen by as much as 80%.
As shown on the chart below and highlighted in the webinar, the US Dollar is actually showing some bullish tendencies from a short-term look; with an ascending triangle built inside of a Fibonacci level around 91.93.
US Dollar Two-Hour Price Chart
Taking a step back on the chart, and that 2021 strength can be discounted to a degree as it’s been a retracement to the 23.6% Fibonacci retracement of that 2020 major move. That retracement level is confluent with the psychological level of 92.50; and when this came into play last week, it brought a strong reversal into the mix.
So from a longer-term perspective it becomes simpler to discount the 2021 topside push in the USD as a corrective move in a longer-term bearish theme. This is similar to what was looked at in the Q1 Technical Forecast for the US Dollar.
US Dollar Weekly Price Chart
EUR/USD Builds into a Bull Flag
Going along with that counter-trend move of USD-strength so far in 2021 has been a similar counter-trend pullback in EUR/USD. But that pullback so far has remained somewhat constructive, taking on the shape of a bull flag formation, which is often approached with the aim of continuation.
If USD-weakness is the net from tomorrow’s FOMC announcement, the topside of this pair could become really attractive again, but as looked at in the next chart, the shorter-term context is a bit different.
EUR/USD Weekly Price Chart
On a shorter-term basis, the bearish trend in EUR/USD could keep the door open for further losses, near-term. Last week saw the build of a shorter-term bear flag formation, with prices pushing up to the key resistance zone from 1.1965-1.2000 during the ECB rate decision, at which point sellers came rushing back.
As shared in the webinar, there’s another reason to focus on the short-term bearish setup in EUR/USD, and that’s because of how attractive USD-weakness may be elsewhere. While the bull flag on EUR/USD weekly does point to the possibility of higher prices, helped along by USD losses; the longer-term setups in GBP/USD and AUD/USD may be more attractive areas to follow continued USD-weakness, rather than against a Euro represented by a Central Bank that just announced they would ‘significantly’ pick up the pace of bond purchases.
EUR/USD Four-Hour Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
GBP/USD: What’s in a (Big) Number?
GBP/USD has been on a sneaky bullish trend over the past six months, represented by a really strong upward sloping channel.
GBP/USD Daily Price Chart
The 1.4000 level is a big deal here and while we did initially see price action ascend beyond this price in February, prices have pulled back and been unable to re-engage above since then. There’ve been no fewer than five separate tests at this level over the past few weeks with seemingly each of them failing. But – if we end up with USD-weakness around tomorrow’s FOMC, that 1.4000 breakout could be an attractive venue to follow for topside breakout potential.
GBP/USD Two-Hour Price Chart
Chart prepared by James Stanley; GBPUSD on Tradingview
AUD/USD Breakout Potential
AUD/USD similarly carries breakout potential after a really strong run, and there’s also a psychological level in play here at the .8000 big fig. That level was tested in late-February before a strong reversal showed. But, since buyers came back into the equation last week, there’s been a hold of higher-low support around the .7750 psychological level. And, from shorter-term basis, there’s even a type of inverse head and shoulders pattern brewing, which can keep the door open for topside breakout potential, targeting the resistance zone around .7820-.7836.
If buyers can push a breakout beyond that price, then the .8000 psychological level may be in-play again soon after.
AUD/USD Four-Hour Price Chart
USD/JPY Finally Finds Resistance – but Can it Hold?
USD/JPY remains a favored market for rates plays. With the Bank of Japan holding at negative rates for going on five years now, and with higher rates getting priced-in to US markets, there’s been a subtle return of the carry as represented by the sharp trend in USD/JPY.
But – the pair (and this theme of higher US rates) is in the spotlight tomorrow for the Fed. If the Fed fails to tamp down inflation concerns, and should rates markets continue to price in higher yields, the topside of USD/JPY can certainly continue to run.
We do appear to be at an interesting juncture, however, as prices in the pair have finally found some element of resistance on a descending trendline taken from 2015 and 2020 swing highs.
USD/JPY Weekly Price Chart
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
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