US Dollar Pulls Back From Highs; Jackson Hole, FOMC Minutes Next Week

US Dollar Pulls Back From Highs; Jackson Hole, FOMC Minutes Next Week


Talking Points:

This week saw another extension in the topside run in the US Dollar, as the Greenback gained Monday-Wednesday, and started to pullback over the final two days of the week. The Dollar ran into a big Fibonacci level on Tuesday and after pushing ahead on Wednesday, fell back-below on Thursday and Friday after a support test was unable to hold. The US Dollar remains with bullish structure as we move to close out this week.

– This week’s move in the Dollar appears to be more-driven by risk aversion than rate policy, and this can be evidenced by the fact that the outlier amongst major currency pairs showing USD strength was the Japanese Yen, which has outpaced USD-strength so far this week. Next week’s economic calendar is back-loaded, as the lone high-impact items on the docket are FOMC meeting minutes from the July rate decision set to be released on Wednesday, and the Jackson Hole Economic Symposium lined up for the latter-portion of the week. Notable – Turkish markets are closed for all of next week in observance of Sacrifice Feast.

– 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.

US Dollar Continues Bullish Run

It’s been another big week for Forex markets as the US Dollar continued its topside move, and this showed some level of impact in most major currency pairs with the notable exception being USD/JPY. That bullish move extended on Monday, Tuesday and Wednesday; and began to pull back over the final two days of this week.

Traders looking to the economic calendar for direction may have to wait a bit, as next week’s economic docket is back-loaded with a couple of high-impact items of interest. Notably, Turkish Financial markets are closed for next week in observance of Sacrifice Feast, but this doesn’t necessarily mean that market participants will stop factoring in potential contagion risk with European banks. Wednesday brings the release of FOMC meeting minutes from the July rate decision. Nothing much really happened in July, so don’t look for any ground shaking announcements in that release – but it will add a bit of context to the situation surrounding the Fed ahead of the widely-expected rate hike in September. The more operative item for traders on next week’s calendar is the annual Jackson Hole Summit, as a ‘who’s who’ of global Central Banking will descend upon Wyoming to discuss policy parameters.

DailyFX Economic Calendar: High-Impact Events for the Week of August 20, 2018

DailyFX Economic Calendar High-Impact Week of August 17, 2018

Chart prepared by James Stanley

These are the types of events that can often be boring, as a Central Bank probably does not want to make any large announcements at this event as opposed to their own bank’s rate decisions. But – we have seen volatility come from these before, such as last year when Euro strength was unleashed as Mario Draghi began to speak. The irony being that Mr. Draghi didn’t even touch the topic of monetary policy in that speech – but markets seemed to care little as they attempted to get in front of ECB rate hikes. This is when EUR/USD first re-tested the price of 1.2000 after trading-below the level for two-and-a-half years.

EUR/USD Daily Price Chart: Down-Trend in the Spotlight Ahead of Jackson Hole

eurusd eur/usd daily price chart

Chart prepared by James Stanley

Jerome Powell to Speak at Jackson Hole Next Friday

Headlining next week’s Jackson Hole Summit will be a speech from FOMC Chair, Jerome Powell. At this point it’s difficult to imagine Mr. Powell going off script or doing anything unexpected, as he has been incredibly consistent in his tenure thus far while putting his stamp on the bank. The Fed is expected to hike at their next meeting in September while also providing updated forecasts and projections, so any forward-looking analysis will likely have to wait for that.

One item that will likely come up is something that’s been getting louder over the past couple of months, and that’s the prospect of ‘currency wars,’ or competitive devaluations. Given that we’ll have a wide slate of contingents from a number of Central Banks at this meeting, it seems an opportune time to reiterate the pledge that currency cross rates will not be targeted as part of monetary policy decisions or discussions.

The big question is whether that will matter? The US Dollar has been gaining as driven by two different themes. Last week saw a dose of risk aversion drive USD up to fresh highs, and before that we had monetary policy divergence as the primary push point. Each of these can serve to continue the trend, and at this point, last year’s sell-off is looking to be but a corrective move in a longer-term theme. That sell-off retraced and found support at the 50% marker of the 2011-2017 major move. That happened in February, and already we’re back-up to challenging the 23.6% marker of that same study. This was the topside of our first target zone in the Q3 Technical Forecast on the US Dollar.

US Dollar Monthly Price Chart: Strength Returns After 2017 Down-Trend

us dollar usd monthly price chart

Chart prepared by James Stanley

US Dollar Setup to Challenge 98.00 on DXY

The final target for our Q3 Technical Forecast for the US Dollar rests around the psychological level of 98.00. This is a confluent area as there are multiple longer-term Fibonacci levels here, but the big question is whether USD can make that topside push from here, with RSI already showing overbought indications; or whether we’ll need a deeper pullback to a bigger, more operative area of support before that push might be ready to go.

Such support potential exists in an area that had provided resistance for almost two months in the US Dollar. This area runs from the psychological level of 95.00 up to the prior swing high of 95.53. If Dollar bulls do stumble in the coming weeks, this becomes an attractive area to look to for support with aims of bullish continuation.

US Dollar Daily Price Chart: Will Almost Two Months of Resistance Help to Provide Support?

us dollar usd daily price chart

Chart prepared by James Stanley

EUR/USD

EUR/USD found a bit of support on Wednesday around the 1.1300-handle, and since then prices have been in the midst of a short-term rally. With Turkish financial markets closed next week, the concern around European bank’s exposure to the situation will likely continue– but the Jackson Hole Summit seems an opportune time for the ECB to discuss various options for containing contagion within their banking system in a worst case type of scenario.

In EUR/USD, the big question is whether prices can continue to retrace until some longer-term support (and potential resistance) can start to come into play. We had looked at the pair as one of our FX Setups of This Week with the goal of catching a higher-low for bearish continuation. But – sellers were unwilling to step back long enough for resistance to come into play and prices just continued to slide for the first few days of this week.

EUR/USD Daily Price Chart: Bounce From Lows Exposes Lower-High Resistance Potential

eurusd eur/usd daily price chart

Chart prepared by James Stanley

GBP/USD: Can the British Pound Hold on to Fibonacci Support

This week saw another extension in the wave of selling in the British Pound after the earlier-month rate hike out of the Bank of England. Cable eventually ran into a long-term level of support on Wednesday, and since then the selling has appeared to start to slow. But – we go into this week’s close in a rather difficult position for bears, as RSI is oversold after this big-picture support came into play. While there is little by way of positivity around the British Pound right now, despite yesterday’s not terrible numbers, the door may be soon opening to short-term reversal plays in GBP/USD, particularly if a deeper pullback can show in the US Dollar (to the 95.00-95.53 zone mentioned above).

GBP/USD Weekly Chart: Oversold with Long-Term Fibonacci Support

gbpusd gbp/usd weekly price chart

Chart prepared by James Stanley

On a longer-term basis, a bullish move developing here would be corrective in nature, and there are three different trend-lines that have been in play over the past two months that can continue to push the down-trend.

GBP/USD Four-Hour Price Chart: Hastening Down-Trend, More Aggressively-Sloped Trend-Lines

gbpusd gbp/usd four hour price chart

Chart prepared by James Stanley

USD/JPY Continues Pullback

The notable exception to this week’s theme of US Dollar strength has been USD/JPY, as the pair is continuing to pullback after the Q3 breakout that started in July has faltered. Prices are still catching a bit of support on the projection of a prior resistance trend-line, and price action has yet to encroach upon the 110.00 psychological level.

But this does highlight a couple of important facts. First and foremost, this alludes to the potential for much of this recent USD-strength being driven by risk aversion rather than rate policy. As markets brace for potential impact in European banks, this makes a strong case for a weaker Euro and a stronger US Dollar and Japanese Yen.

But also of interest is the potential for markets to begin anticipating an eventual announcement of stimulus taper out of the BoJ. While inflation remains lackluster in the island nation, rumors have begun to circulate that the bank may soon be looking to make policy ‘less loose.’ If this does happen, and if we do see the BoJ and the Japanese government making the initial steps towards a lighter QQE outlay, then there is a very valid case for a continuation of Yen-strength. That could show promise in pairs like GBP/JPY and EUR/JPY, as weak Pounds or Euros are matched up with a strengthening Japanese Yen clawing back years of QE-fueled weakness.

USD/JPY Daily Price Chart: A Sliding Scale of Support

usdjpy usd/jpy 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 Q3 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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