US Dollar Talking Points:
- The US Dollar pulled back on the week despite a strong bounce on Wednesday that was largely priced-out on Thursday and Friday.
- Next week brings the FOMC rate decision with expectations currently looking for a 25-basis point hike. But the Summary of Economic Projections will be important here as this will be the first set of updated projections provided by the bank since December and should show how aggressively they’re looking to address inflation moving forward.
- I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.
Next week brings the FOMC rate decision for the month of March and there’s been some considerable commotion of late around macro-prudential risks. Rate expectations have been all over the place in response, and at this point there’s heavy expectation for another 25-basis point hike from the FOMC next Wednesday. There’s also some expectation for another 25-basis point hike at the bank’s next meeting in May (approximately 30%, as of this writing); but later in the year the outlook gets far more opaque. Going out to December of this year there is currently a 5.9% probability that rates are at the current level or higher, deductively highlighting the expectation for rate cuts later in the year from the Federal Reserve.
CME Fedwatch – Target Probabilities for Fed Funds at Dec. 13th FOMC Rate DecisionChart prepared by James Stanley; data derived from CME FedWatch
So, markets are expecting cuts to come into play in the second half of this year and so far, the Fed hasn’t mentioned anything regarding that topic. But the Summary of Economic projections that’s released as part of the Fed’s rate decision next Wednesday will offer some clarity on this front, as the Fed will share their expectations for rates, growth, and inflation. And this can help markets to get a better idea for how aggressively the bank is looking to move-forward with inflation after the recent problems that began to appear in the banking sector.
As rate hike expectations have pared back, so has the US Dollar. This week saw support play-in from a familiar level at 103.45 which led to a bounce on Wednesday, with prices moving up for another re-test of the 105 level. A pullback on Thursday and Friday erased the bulk of that move as we move into the weekend.
The US Dollar chart has the makings of an inverse head and shoulders pattern with neckline at the current three-month-high of 105.82. These formations are often followed with the aim of bullish breakouts, looking for a breach of the neckline to open the door to a fresh trend. But, for now, 103.82 support is in play (prior 2017 swing high), after which 103.45 and 103 (2020 swing high) come into play.
US Dollar - DXY Daily Price Chart (indicative only, not available on Forex.com platforms)Chart prepared by James Stanley; data derived from Tradingview
It was a wild week in the Euro as EUR/USD came into the week with a bounce, eventually running up to resistance at 1.0747. I had looked into that level in last week’s US Dollar Price Action Setups, and as USD strength was pricing in on Wednesday, EUR/USD put in a fast fall from that level, all the way down to support which runs from 1.0482 up to 1.0515.
The level of 1.0515 is key as this is the 50% marker of the same Fibonacci study from which the 1.0747 level originates (which is the 61.8% retracement of that same study).
That support zone helped to hold the lows and the ECB rate decision on Thursday helped to bring a minor bounce, albeit within the pre-established range. At this point, EUR/USD is working on its second consecutive week of indecision, with the caveat that this current doji on the weekly also comes with a higher-high and a higher-low from the prior week. This illustrates range expansion, and given the doji, continued indecision. This also highlights growing breakout potential and the support and resistance from last week can be used to plot for that next move.
A break above the 1.0750 resistance opens the door for the 1.0800 level, after which 1.0943 and 1.1033 come into the picture. For support, a break of the 2023 low at 1.0483 opens the door for a move down to a familiar level around the 1.0350 zone.
EUR/USD Weekly Price ChartChart prepared by James Stanley, EUR/USD on Tradingview
Cable continues to exhibit tendencies of a range, which has now been in-place for almost four months. There was threat of breakdown the week before last, but support held around the 1.1835 Fibonacci level and price has since meandered higher within the range.
Price action held support above the 1.2000 big figure this week and this keeps the door open for a push up to another area of interest, around 1.2297. This is the 50% mark of the 2021-2022 major move and this level offered support in January before helping to cauterize resistance in mid-February. A hold there keeps the door open for bearish swings, plotting for range continuation. Above that we have the apex of range resistance at 1.2447, after which the 1.2500 psychological level comes into the picture. A daily close above that level indicates a broken range.
Below current price action, the 1.2100 level presents short-term support potential, after which the 1.2000 psychological level and then the 1.1836 Fibonacci level come into the picture.
GBP/USD Daily Price ChartChart prepared by James Stanley, GBP/USD on Tradingview
USD/CAD saw a support test at a prior point of resistance last week, which helped to contain the low. I had looked at a setup in the pair the week before last, ahead of the BoC rate decision. At the time, an ascending triangle had formed in USD/CAD, with the horizontal resistance coming in at 1.3652, which is the 61.8% Fibonacci retracement of the 2020-2021 major move.
That breakout hit and price ran all the way up to resistance at the 1.3808 level, setting a fresh five-month high in the process. This week saw prices pullback to find support at that same spot of prior resistance. This keeps the bullish trend alive, and USD/CAD may be one of the more enticing pairs for USD bulls at the moment, particularly considering the fundamental angle, where the BoC is largely thought to already be at that point of pause with rate hikes while the FOMC doesn’t appear to quite be there yet.
The next area of resistance for USD/CAD is a major spot, around the 1.4000 psychological level and spans from the 2022 high of 1.3970 up to the Fibonacci level at 1.4040.
USD/CAD Weekly Price ChartChart prepared by James Stanley, USD/CAD on Tradingview
On Wednesday, when USD strength was running high on the back of fear around US banking, one of the few pairs that was not showing USD-strength was USD/JPY.
I had talked about that in an article on Monday, and then again on Wednesday, but the simple rationale is that after the pair had built so aggressively with the carry trade last year, signs of fear or risk aversion drive capital flows out of the pair, aka, ‘carry unwind.’
At this point, USD/JPY has been putting in lower-lows and lower-highs, with another lower-high this week at the 135.00 psychological level. Price is moving towards that next support level at 131.58, with the 130.40 spot just below that. If bears can push prices back-below the 130 level, that becomes a very bearish indication for near-term price action.
And while USD/CAD may be one of the more enticing pairs for USD bulls at the moment, USD/JPY may be one of the more exciting pairs for USD-weakness scenarios.
USD/JPY Daily Price ChartChart prepared by James Stanley, USD/JPY on Tradingview
--- written by James Stanley, Senior Strategist
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