Pre-FOMC US Dollar Price Action Setups: EUR/USD, USD/JPY, GBP/USD, USD/CAD

US Dollar Talking Points:

• Tomorrow is a rate decision from the Fed and this comes with no update to the bank’s guidance or projections, meaning even more focus will be on FOMC Chair Kevin Warsh.
• So far, Warsh has hosted three press conferences after rate decisions and two were quarterly meetings and one was not. Notably, in the one meeting that did not contain projections or guidance, equity markets took off higher as USD weakness took over.
• With mid-term elections next week, a hawkish lean from Warsh could put stocks on their back foot, similar to what showed last week. And while Warsh continually tries to refrain from giving guidance, that just forces markets to lean harder into any hints that he may offer.

The stage is set for a busy next few weeks ahead and at this point, we’re still very much in the ‘getting to know you’ stage with FOMC Chair Kevin Warsh.

While he came in with the wide expectation that he would push President Trump’s dovish agenda, one driven by the prospect of ‘we will grow our way out of debt,’ Warsh has, so far, been far more hawkish than what markets have expected. At least, that’s what he’s sounded like. As I said back in July ahead of his second meeting atop the Fed, I thought markets were starting to see through that given the backdrop, where a dovish Warsh would simply compound the Fed’s problems as inflation remained high and bond yields would fly on the back of both oncoming supply and a Fed disinterested in tackling inflation.

Instead, at Warsh’s first meeting at the bank on June 17^th, a risk-off reaction showed in stocks and a rally in the US Dollar. This had markets on their back foot to such a degree that coming into the July  meeting, there was a veritable coin flip for a rate hike, something we hadn’t seen in more than a decade as the Fed embraced messaging and forward guidance after the Financial Collapse.

The bank, of course, did not hike in July and this is where I think markets began to see through the hawkish image that Warsh wanted to project. The USD sank and S&P 500 Futures posted a bullish engulf the day after that meeting, and then, along with the Nasdaq, ran to a fresh all-time-high.

At the bank’s September meeting, Warsh really had little choice as there was vote for a rate hike and the updated guidance from the Fed showed expectation for another hike into the end of the year. But, tomorrow, we’re back to a more limited offering as there will be no update to projections and, instead, like July, the focal point will be squarely on the Fed chair and any hints he might be willing to offer.

US Dollar Daily Chart – Warsh Rate Meetings Applied

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

As a 57.6% component of the DXY basket, the Euro plays an incredibly important role in FX markets. And given the drama continuing to show in French bond markets that doesn’t bode well for Euro bulls or USD bears, and as such, we’ve seen sellers continuing to push. We hear from the ECB the morning after the Fed, and markets will be keen to hear whether Christine Lagarde makes any pledges of support towards France given the situation.

At this point, the 1.1100 level around recent lows looks vulnerable, and the 1.1000 psychological level is the next major level lower.

EUR/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD

For USD-weakness, I still think GBP/USD presents a more attractive backdrop. As I looked at last week, price had already found a big spot of resistance, and rather than chase, waiting for a pullback seemed the more reasonable way forward.

Well, we now have that pullback, and price is hovering just above that zone of prior resistance, from around 1.3276 up to the 1.3300 handle.

GBP/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

We also have a BoJ meeting later this week, and while there’s little expectation for a hike there I think there’s still an expectation for a hawkish lean from the BoJ. But, that said, given where inflation is in both the US and Japan, it would be difficult to justify a fundamental shift at this point and thus, the long side of the pair can remain attractive particularly for bullish USD scenarios.

The larger challenge arises if/when resistance comes back into play around the 159.00 or 160.00 levels but, so far, there’s been a strong response to support at 156.68.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD

Also of interest on the long side of the US Dollar is USD/CAD.

I looked at the pair going into the weekend as the 1.4000 level had come back into play, and I looked into that again yesterday. At this point, that 1.4000 support has helped to hold the pullback, and if we see a bullish USD around tomorrow’s Fed meeting, I think this one stands out as an attractive market.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro