US Dollar Set to Break Impasse with ECB, BoJ, FOMC and BoE On Deck

  


Talking Points:

– Tomorrow brings the ECB’s July rate decision, and the following week brings the Bank of Japan (Tuesday morning in Asia, Monday night in Europe, the UK and the US), the FOMC and the Bank of England’s ‘Super Thursday’ rate decisions.

– So far in Q3 many FX markets have been mired in varying forms of congestion after big moves played-out in Q2. With a series of high-impact drivers on the radar over the next week, we might finally see some of those prior trending themes come back in the spotlight. Of particular interest is whether the Euro continues its descent, which could keep the door open for bullish strategies in the USD.

– 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.

Q3 Digestion Continues Ahead of ECB

The US Dollar continues to move in a rather direction-less manner, and this means many major currency pairs are set up the same. This has been a Q3 theme that has yet to find resolution as prices have built deeper into digestion or congestion formations for much of the new quarter. That may not last for too much longer, however, as tomorrow begins a chain of Central Bank events on the economic calendar for the next week. After the ECB’s rate decision tomorrow morning, we have the Bank of Japan set to report the following Monday night; the Fed is on deck for next Wednesday and the Bank of England hosts a ‘Super Thursday’ rate decision next Thursday morning.

So, for FX traders that have been hanging on to trend-lines and ranges that haven’t yet shown much for breaks or bounces, volatility may soon be near. Below, we’re going to look at price action around the US Dollar ahead of those rate decisions. If you’d prefer video, we discussed many of these themes in yesterday’s webinar entitled, US Dollar Price Action Setups Ahead of ECB.

US Dollar Retains Bullish Bias, But So Far Unable to Take-Out 95.00

Q2 was big for the US Dollar, as we finally saw a move of strength following five consecutive quarters of loss. Those five quarters of drawdown were taking place as the Fed was pretty much the only game in town for rate hikes; and investors were continuing to bid-higher currencies out of Europe or the UK in anticipation that they would soon join the Fed in tightening policy. But, when it became obvious in Q2 that the ECB wouldn’t soon be hiking rates, EUR/USD broke-lower and this allowed the Dollar to rise, finally breaking that bearish trend that dominated the currency’s 2017 price action.

US Dollar Retains Bullish Bias, But Enthusiasm Waning

us dollar usd daily price chart

Chart prepared by James Stanley

But now that the Dollar has a bid along with bullish aspirations, buyers haven’t appeared so enthused as we’ve walked into Q3, and this begs the question as to whether or not last quarter was but a blip in a longer-term bearish radar, or whether this is the start of something new. The ‘something new’ category would be suspect, as the primary driver for Dollar-strength (FOMC rate policy) is a factor that was present throughout last year’s down-trend.

EUR/USD Drives Deeper into Digestion Ahead of ECB

More likely, that bullish move in USD from Q2 has more to do with the bearish drop in EUR/USD. As the European Central Bank disappointed markets with more dovish rate guidance than what was expected, capital flowed out of the Euro and into the US Dollar. But – the ECB set the bar for rate hikes extremely low – looking out to the end of next year – and it may not be difficult for data to begin pushing-up the prospect of faster-than-expected rate hikes, helping to bring strength back into the single currency.

The bulk of the bearish move in EUR/USD took place in April and May, and since then the pair has remained within a range between 1.1509 and 1.1852. So far in Q3, that range has continued to grow tighter and tighter as indicated by the symmetrical wedge formation below. For those looking at taking a longer-term directional stance, a breach below 1.1500 opens the door for shorts while a break-above 1.1852 begins to re-open the door for longs.

EUR/USD Daily Price Chart: Price Action Tightens Ahead of ECB

eurusd eur/usd daily price chart

Chart prepared by James Stanley

GBP/USD Continues Recovery After Last Week’s Failed Test at 1.3000

The British Pound has gotten hit by a series of factors over the past couple of months, and as we get closer and closer to negotiations between the EU and UK, matters still remain rather murky on the Brexit-front. Coming into Q3, the one significant positive for the British Pound was the prospect of a rate hike out of the Bank of England. With inflation remaining above the bank’s target, and with three dissenting votes at the last rate decision, there was a growing possibility that we’d see the BoE hike rates at their rate decision scheduled for next week.

That theme was negated by last week’s inflation release out of the UK, as we saw yet another disappointing print with the third consecutive month at 2.4%. This helped GBP/USD to finally test below the key psychological level of 1.3000; but as we’ll often see with an initial test of a ‘big’ whole number level, behavior changed once we traded through. Bears slowed the selling once we tested below 1.3000, and as that USD reversal started around President Trump’s comments last Thursday, the pair shot-higher in a quick recovery.

As we wrote on Monday, the longer-term trend remains bearish, but the door was opening for short-term bullish setups in the effort of playing the retracement. Prices have continued to budge-higher on a shorter-term basis, but we’re fast nearing a key area of support around the 1.3200-handle.

GBP/USD Four-Hour Price Chart: Cable Correction Continues After Support at Prior Resistance

gbpusd gbp/usd four hour price chart

Chart prepared by James Stanley

USD/JPY Attempting to Cauterize Support Ahead of BoJ

It was just two weeks ago that USD/JPY was flying high from a bullish breakout from 111.50, and that theme saw the pair run as high as 113.00 before prices finally started to reverse. And on short-term charts, what started as a trickle turned into a waterfall, as the initial pullback was driven by the Trump comments last week; but the move was soon hastened by circulating reports that the BoJ would start to scale-back their own stimulus program at the BoJ rate decision on the docket for next week.

That report was dismissed by BoJ Governor Kuroda, and the continued languish in Japanese inflation would seem to agree with a continued passive stance at the Japanese Central Bank. Nonetheless, the US Dollar has been unable to establish any significant element of strength over the past week, and that’s helped to hold prices around 111.00 after the earlier-month breakout.

USD/JPY Daily Price Chart: Attempting to Dig-Out Support From Prior Resistance

usdjpy usd/jpy daily price chart

Chart prepared by James Stanley

We looked into USD/JPY in yesterday’s webinar, attempting to use short-term charts to work-into a longer-term bullish position. As we shared, traders can wait for the initial stages of a bullish trend to show on the hourly chart in the effort of trading a return of that longer-term up-trend.

USD/JPY Hourly Price Chart: Using Short-Term Charts to Monitor Long-Term Themes

usdjpy usd/jpy hourly price chart

Chart prepared by James Stanley

USD/CHF Testing Trend-Line Support

USD/CHF has had difficulty holding on to its bullish trend above the parity level, and this has helped prices to pullback over the past week. We’re seeing another test of a trend-line that started in early-June, and this can keep interest high for topside continuation in the pair.

The challenge around the current setup in USD/CHF is the fact that the pair appears to be building into an ascending triangle, which would normally be attractive for bullish breakouts. But there’s so much longer-term resistance above the 2018 high that looking for topside breaks there could be unattractive.

USD/CHF Daily Price Chart: Struggle to Sustain Above Parity, Rising Trend-Line Builds From June

usdchf usd/chf daily 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 Q1 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





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