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US Dollar Primed for FOMC; EUR/USD Grasps on to Support Ahead of ECB

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Talking Points:

– The next 24 hours bring two pivotal rate decisions to the forefront of global markets. At 2PM ET this afternoon, we hear from the Federal Reserve at a rate decisions that’s widely-expected to bring another 25 basis point adjustment. More pressing, however, is the bank’s tolerance towards a fourth hike in 2018, along with the recent item of whether the FOMC may start to host press conferences around each rate decision, as opposed to the current format of hosting press conferences after every other meeting. We looked at a couple of setups on either side of the US Dollar in yesterday’s Analyst Pick, entitled EUR/USD, USD/JPY with Bullish Prospects Ahead of FOMC, ECB, BoJ.

– Tomorrow brings an ECB rate decision in which market participants are looking for the initial details for how the bank may look to gradually exit their massive QE program. The current program is set to expire in September of this year, and after tomorrow’s meeting, there is only one more rate decision before that September end-date, set for July 26th.

– 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 Primed for FOMC – Will the Bank Forecast a 4th Hike?

Today at 2PM ET brings the Federal Reserve’s June rate decision, and a hike as long been expected at this meeting. The more pressing concern is how optimistic the Fed might be towards an additional two hikes this year. In March, the Fed had a central expectation for a total of three hikes in 2018, or one more after today’s meeting; and that appeared to be well-received by risk markets, and US data has continued to print in a positive manner. At this stage, there’s a 47.2% probability of getting two more hikes in 2018 to bring the total to four, and that appears to be where the source of today’s USD volatility will emanate from, expectations around a fourth interest rate hike in 2018.

FOMC Debates Transparency Tweak

Another item of interest popped up during yesterday’s session. A report began to circulate indicating that the Fed may tweak their transparency in a goal of becoming less predictable. Many will probably remember that FOMC rate decisions didn’t always come with an accompanying press conference. That was rolled out in 2011 in the effort of being more transparent with markets; and given the backdrop at the time, it was essentially an opportunity for the Fed to soothe the concerns of market participants by telling them that rates will remain low for the foreseeable future. That element of transparency can be a really good thing in a low rate environment as it drives confidence into markets that the monetary backdrop will remain accommodating, but can the same be said about a rising rate environment?

The primary concern at the Fed appears to be the pattern that has developed in which the Fed has only hiked at meetings with press conferences, or every other rate decision. The report circulating yesterday indicated that recently installed FOMC Chair Jerome Powell may begin to host press conferences at every FOMC rate decision, and this would make it more difficult to forecast when exactly the Fed is planning their next rate hike(s).

The immediate response to that circulating report was a show of USD-strength, and prices moved-higher within the ascending channel that we looked at yesterday. With context, that ascending channel may be a bear flag formation, as prices have started to rally after pulling back last week, and that keeps the door open for bearish strategies in the US Dollar.

US Dollar Two-Hour Chart: Bullish Channel Builds After Last Week’s Sell-Off

US Dollar two-hour chart usd

Chart prepared by James Stanley

On a longer-term basis, the US Dollar has held support around the 23.6% Fibonacci retracement of the bullish move that started in February of this year. The confluent zone of resistance remains in the zone that runs from 94.19-94.30, and topside breaks above that area open the door for a re-test of the 95.00 level on DXY.

If we aren’t able to hold this support through today’s rate decision, however, the door is opened for a deeper bearish move, and that area around 92.50 could be attractive for the next downside target, as this is near the 38.2% of the 2018 bullish move (92.44), and this syncs up with the January swing-high in the pair (92.64).

US Dollar Daily Chart: 23.6% Retracement of 2018 Bullish Move

US Dollar USD Daily Chart

Chart prepared by James Stanley

ECB is On Deck – How Much Detail Will Be Provided Around QE Exit?

Not more than 18 hours after the Fed’s rate decision brings another key event to markets. This is the European Central Bank’s June rate decision, and over the past week the building hope is that we might hear how the bank will look to begin tapering their stimulus purchases when the current QE program reaches its September, 2018 end date.

The ECB’s Chief Economist, Peter Praet openly said last week that the ECB would begin to discuss the bank’s gradual exit from QE at tomorrow’s rate decision. This comes from a bank that never pre-commits, so we may not be looking at an unconditional exit strategy; and we may not even get many details as to how the ECB is going to do this, instead pushing that forward to the bank’s July rate decision.

More pressing, however, will be the staff projections out of the ECB, and where the bank sees inflation moving towards the end of the year and in the early-portion of 2019. Last month’s inflation print surprised to the upside, coming in at 1.9%, just underneath the ECB’s 2% target.

Euro-Area Inflation Surprises to the Upside in May

Euro-Zone CPI

Chart prepared by James Stanley

That report was at least partially obscured by the political turmoil at the time, as an aggressive bearish move had just shown in the currency after the volatility coming from Italian politics. As political risk has calmed in the Euro-Zone in the two weeks since, buyers have come back into the currency to push EUR/USD back-above a key zone on the charts. This area runs from the prices of 1.1685-1.1736, and each of those levels are taken from longer-term Fibonacci studies. This zone helped to provide support on a number of occasions last year, only breaking after the ECB extended stimulus into 2018, at which point sellers started to use that zone for resistance.

Two weeks later, a red-hot German GDP report brought strength back into the single currency, and prices pushed back-above this area. After support swings in November and again in December, prices launched up to a fresh three-year high around 1.2500.

EUR/USD Daily Chart: Back to Key Area of Support/Resistance 1.1685-1.1736

eurusd eur/usd daily chart

Chart prepared by James Stanley

On a shorter-term basis, we can see where this zone has come into play over the past couple of weeks as buyers have returned, most recently yesterday after that quick rush of USD-strength on the circulating report of the FOMC hosting a meeting after every rate decision. This now gives a couple of different support tests around the top-side of that zone, along with a descending trend-line taken off of this week’s highs. This would make for a descending wedge pattern on the four-hour chart of EUR/USD as we approach two pivotal rate decisions over the next 24 hours.

EUR/USD Four-Hour Chart

eurusd eur/usd four-hour 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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Forex

Cable Attempts to Carve Out Support Ahead of BoE

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Talking Points:

– It’s been a stark change-of-pace over the past two months as a previously strong bullish up-trend has turned around to erase more than 1,100 pips since mid-April. GBP/USD has been hit by a storm of slowing inflation, disappointing GDP, a dovish Bank of England and continually downbeat headlines around the ongoing Brexit discussions.

– This week brings a Bank of England rate decision followed by the Mansion House speech from BoE Governor, Mr. Mark Carney.

– Quarterly Forecasts have just been updated, and the Q2 forecast for GBP/USD is 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.

Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.

A Stark Change-of-Pace the Past Two Months

It’s been a rough two months for the British Pound, and later this week brings a Bank of England rate decision that could prolong the pain or, potentially, start to change-the-pace. While there are few expectations for any actual changes at that meeting, the big question is whether the bank starts to lay the groundwork for a possible rate hike in August. After that rate decision, BoE Governor Mark Carney is due for his annual Mansion House speech, and this may actually turn out to be a more proactive driver for the Pound as the speech will be widely-watched for clues or hints around Mr. Carney’s expectations for the UK economy.

DailyFX Economic Calendar – High-Impact Items for GBP Week of June 18, 2018

DailyFX Economic Calendar GBP High-Impact Events Week of June 18, 2018

Chart prepared by James Stanley

Also of interest but not on the economic calendar is the continued development around Brexit. At this point, a battle continues within Parliament over what should happen if either a) no deal is reached with the EU or b) Parliament doesn’t approve the deal brokered between the two. This can continue to constrain price action in the British Pound as its yet another potential risk to the currency.

GBP/USD Digs in to Support

Just a couple of months ago the horizon appeared to be much brighter for the British Pound. We had a legitimate chance of getting a rate hike at the May ‘Super Thursday’ rate decision, and this even had the potential to turn into something more as the BoE may have been sitting at the forefront of a rising rate cycle. This was driven in large party by inflation, and that was largely in response to the drubbing that the currency took around the Brexit referendum.

But as we traded deeper into April, that backdrop for a rate hike deteriorated. Inflation continued to disappoint, and GDP even came-in below expectations. By the time we got to the actual rate decision, the door had been opened for an even more dovish BoE, and when the bank held rates while sharing a rather dovish forward-outlook, GBP sank down to the key support area round 1.3500.

GBP/USD Daily Chart: Past Two Months Represent Stark Change-of-Pace for Cable Price Action

gbpusd gbp/usd daily chart

Chart prepared by James Stanley

It was a week after that rate decision that Brexit dynamics began to come back into the equation, and when Scottish PM, Nicola Sturgeon, announced that Scotland may embark on another independence referendum, GBP/USD broke-below support and ran down to a fresh six-month low at 1.3203.

Prices spent the next two weeks moving-higher within a bullish channel; and when that channel was combined with the prior bearish trend, this took on the shape of a bear flag formation. That formation began to fill-in last week as USD strength started to show up, and prices have made another run down to the 1.32’s.

GBP/USD Eight-Hour Chart: Bearish Break Below Bullish Channel, Bears Get Shy at the Low

gbpusd gbp/usd eight hour chart

Chart prepared by James Stanley

At this stage, GBP/USD has shown little willingness to test below 1.3200; and while this doesn’t preclude the possibility of such, it does show how bears are likely going to need a bit more information before staging their plays. If we do get a downside break below the 1.3200 level, the door opens for a test of 1.3117, which is the 38.2% retracement of the ‘Brexit move’ in the pair, followed by a test of the 1.3000 psychological level.

GBP/USD Daily Chart: Bearish Potential Down to 1.3000

gbpusd gbp/usd daily chart

Chart prepared by James Stanley

Retail Sentiment Stretched to the Long Side

Supporting the bearish side of GBP/USD is the fact that retail traders are heavy net-long in the pair, currently showing a read of +2.82-to-1. This means that 73.8% of retail traders in GBP/USD are currently holding a net long position, and with this being a contrarian indicator, this keeps the door open for continued downside. This indicator swung to net-long on April 20th, just after the pair had started to turn, and retail traders have continued to buy as prices have continued to decline.

Click here for an updated, real-time look at GBP/USD Sentiment.

Retail Traders Remain Heavy Net-Long in GBP/USD

GBP/USD IG Client Sentiment As of June 18, 2018

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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EURUSD Net-Long Positions Drop Below 60%

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EUR/USD

Net-Short Trades up 11.9% Since Yesterday

EURUSD: Retail trader data shows 56.9% of traders are net-long with the ratio of traders long to short at 1.32 to 1. The number of traders net-long is 0.8% lower than yesterday and 9.4% higher from last week, while the number of traders net-short is 11.9% higher than yesterday and 2.5% lower from last week.

Euro Continues to Trade With Mixed Bias

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Abdullah AlAmoudi, DailyFX Research



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US Dollar Strength, Euro Weakness Remain as Risk Aversion Shows Up

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Talking Points:

– Last week’s rather visible move of US Dollar strength continues to hold as we open up a fresh week. DXY pulled-back from the 11-month high on Friday. This comes after a sizable move of strength in the Dollar coming from the European Central Bank’s rate decision, which helped to prod EUR/USD back-down towards the 1.1500-handle.

– While the ECB finally unveiled details for how they’re going to look to gradually exit from QE, the bank also shared a very dovish vantage point with markets by saying that they’re not anticipating rate hikes until at least through the summer of next year. Meanwhile, the Fed has been fairly clear about their intentions, updated most recently last Wednesday when the bank hiked rates for the second time in 2018. The FOMC wants to hike rates five more times by the end of next year, during which time the ECB expects to hike maybe once. This rate divergence is the driver behind the recent move in EUR/USD, but the big question is how much continuation power might be left. We look at the prospect of lower-high resistance in EUR/USD below.

– 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 Maintains Near 11-Month Highs After Last Week’s ECB-Fueled Burst

Last week was a big one across global markets as a number of drivers and potential new themes were unveiled. The Federal Reserve took a hawkish stance at their rate decision on Wednesday, but the immediate impact was weakness in the US Dollar as a report around increased US-Chinese tariffs began to circulate during Mr. Powell’s accompanying press conference. And then the following day saw the European Central Bank offer details on how they’re going to look to exit their massive stimulus program later in the year. They also shared that they’re expecting to keep rates at current levels ‘at least through the summer of 2019,’ and this led to a net response of a weaker Euro as markets kicked bets for rate hikes from the ECB further-out into the future. That move of Euro weakness was intense, and in short order the currency was below the 1.1600 handle while, in a corresponding move, the US Dollar had firmed up to the 11-month high. As we open this week, that resistance remains as the US Dollar lingers near those prior highs.

US Dollar via ‘DXY’ Daily Chart: Resistance at 11-Month Highs, Support 94.20-94.30

us dollar usd daily chart

Chart prepared by James Stanley

The big question in the early portion of this week is one of motivation. Will those themes of Dollar-strength and Euro-weakness that showed so prominently in the latter-portion of last week continue into this week? Mario Draghi is speaking on multiple occasions at the ECB forum in Sintra, and this will afford the ECB President multiple opportunities to clarify or define some of his prior statements; and this could continue to push the single currency as markets attempt to grapple with European rate expectations in the tail end of 2019.

On a longer-term basis, the swing-low from a couple of weeks ago looms ominously on the chart; and there’s the potential for lower-high resistance in a key zone should a deeper bounce build-in as we open this week. That area runs from 1.1685-1.1736, and this has been support or resistance multiple times over the past year. This area had shown as resistance after that brutal sell-off in the pair in May, soon becoming support as we walked into ECB. Prices broke-down around last week’s meeting, cutting directly through this area as sellers grasped control. If we do get a bounce into this zone, the door opens for bearish strategies, looking for lower-high resistance ahead of a print to fresh lows.

EUR/USD Daily Chart: Lower-High Resistance Potential in Key Zone 1.1685-1.1736

eurusd eur/usd daily chart

Chart prepared by James Stanley

This Week’s Economic Calendar

The ECB conference in Sintra is the highlight for the first few days of this week, but matters pick up on Thursday with rate decisions out of the Bank of England and the Swiss National Bank. No actual rate moves are expected at either meeting, but the details here are what’s important. At the Bank of England, the item of interest is whether the bank lays the groundwork for a possible move in August at their next Super Thursday rate decision; and in Switzerland, inflation just hit its highest level since 2011, printing at one-percent in the month of May.

DailyFX Economic Calendar: High-Impact Events, Week of June 18, 2018

DailyFX Economic Calendar High Impact Events Week of June 18, 2018

Chart prepared by James Stanley

Risk Aversion Potential in Equities

One of the more noticeable themes emanating from the one-two combo of last week’s FOMC and ECB meetings has been an uptick in risk aversion. The Dow Jones Industrial Average was bucking-up against a key area of resistance as we went into the Fed rate decision, and prices promptly began to turn-lower as the FOMC brought a hawkish tone to markets. Thursday saw a Doji build in the Dow as the ECB remained loose and passive, but Friday saw more selling; and so far futures markets are indicating more of the same as we open into a fresh week.

We had looked at a short-side setup in the Dow last Tuesday, and that theme has continued to show. On Friday, we published an update, looking for some element of support around the prior zone of support around 24,500.

Dow Jones Daily Chart: Turning From 14.4% Fibonacci Retracement (post-Election move)

Dow Jones Industrial Average DJIA DIA Daily Chart

Chart prepared by James Stanley

Risk Aversion in FX-Land: Look to the Yen

In our FX setups for this week, we looked at a currency pair that could be attractive should this theme of risk aversion continue to build. We had focused in on GBP/JPY for that purpose, looking to focus-in on Yen strength along with what could be an amenable counterpart in the British Pound, all while looking to avoid the Euro as the single currency has its own themes getting priced-in. Prices in GBP/JPY were finding resistance at a key level to close last week, and this opened the door for short-side stances, targeting a re-test of the 145.00 level that had turned prices around in March, followed by the May swing at 143.20 on the way to fresh lows.

GBP/JPY Daily Chart: Bearish Continuation Potential in Risk Aversion Scenarios

gbpjpy gbp/jpy daily 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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