US Dollar Price Outlook Talking Points:
- The US Dollar spent most of last week recovering from an early-June sell-off, with buyers retracing as much as 61.8% of that prior bearish move.
- The US Dollar will likely stay in-focus this week as the Wednesday FOMC rate decision looms large on the economic calendar. There’s a 22.5% chance of a cut on Wednesday, but market participants are looking for as many as three cuts in the remainder of 2019. This will place emphasis on the Fed’s Summary of Economic Projections (SEP) as market participants evaluate the dot plot matrix to see how many rate cuts the Fed might be planning for the rest of this year.
US Dollar Bounces After Early-June Sell-Off
June got off to a heavy start as a sell-off in the US Dollar went along with a strong ramp in US equities. And that theme lasted for much of the past two weeks as an FOMC rate decision sits on the calendar for this Wednesday. And while there’s been little expectation for any actual moves at this week’s rate meeting, the growing consensus has been for the FOMC to make a dovish hint towards future rate policy in order to offset some of the risk items that have shown of recent. Markets have come to expect as many as three rate cuts by the end of 2019, with the first move expected around the July rate decision; and this dovishness at the Fed has even been confirmed to some degree, taken from comments shared by Jerome Powell earlier this month. On the heels of those Powell comments is when equities started to rally and the US Dollar put in an aggressive move-lower as stocks were running-higher. This was punctuated by a strong breakout in Gold, which generally shows around such themes of lower rate and inflation expectations.
So, the focus for Wednesday will likely be on the Fed’s projections via the dot plot matrix. The big question is whether the FOMC can come out as dovish as what markets have come to expect, looking for as many as three cuts in the remainder of this year. This can be a difficult case to justify if we’re looking at the Fed’s dual mandate, in which last week’s inflation figures came-out very close to the bank’s 2% target. But, that’s not the only factor of consideration, as illustrated by Powell’s speech earlier this month in which he said that the Fed’s ‘overarching’ goal was to extend the current economic expansion.
At this point, the US Dollar spent last week recovering approximately 50-61.8% of the prior sell-off. Resistance showed-up on Friday and again after this week’s open around the 97.50 level on the chart; and prices have since scaled-back to find a bit of support at the 50% retracement of that recent bearish move.
US Dollar Four-Hour Price Chart
Chart prepared by James Stanley
US Dollar Rising Wedge in Focus
Taking a step back on the US Dollar chart and there’s been the recent build of a rising wedge pattern. Such a pattern will show as two bullish trend-lines collide, taken from a less-aggressive slope around resistance than what’s seen at support. Such a formation will often be approached with the aim of bearish reversals, and the under-side of this formation came into play just two weeks ago. But – buyers showed up as there was a confluence of support as taken from a long-term Fibonacci level and the 200-day moving average.
The big question is whether bears can punch through anytime soon; and the answer to that will likely be determined by how dovish the Fed might be at this Wednesday’s meeting.
US Dollar Weekly Price Chart
Chart prepared by James Stanley
How Dovish Can the Fed Be?
With market expectations for future rate cuts already showing three expected moves by the end of the year, it can be difficult for the Fed to feed Dollar-bears the motivation they might need to further this recent sell-off. This is likely at least part of the reason why the Dollar remained so strong last week: While the Fed has opened the door to future rate cuts, a full-on three-cut-regime can be difficult to justify in our current spot until something else changes.
In the recent past, the bank has at least attempted to strike some tone of stability. Despite a screaming risk sell-off showing up in Q4, the Fed forecast two hikes in 2019 at their December rate decision, and this didn’t really seem to help matters. This was moderated down to zero at the March rate decision when the bank released updated forecasts, and this gave stocks another shot-in-the-arm. And then in early-May, Powell may not have been as dovish as markets were expecting and another risk sell-off showed-up, lasting for most of the month until those early-June comments of support began to come-in.
To say that the Fed finds themselves in an undesirable spot is an understatement. Markets are looking for a series of cuts that the bank may have difficulty justifying. So, how can the Fed re-take control of the situation? A surprise cut this Wednesday may help; and this could be coupled with the expectation for one more cut this year via the dot plot matrix to assuage market participants’ fears. At this point, there’s a mere 22.5% chance of a cut at Wednesday’s meeting, so its not an otherworldly possibility; but if this is truly going to be an ‘insurance rate cut,’ why wait while letting market expectations do the driving?
So, as global markets appear to be full geared-up for a Fed disappointment in Wednesday’s projections, the possibility certainly exists that the bank may start to cut rates in order to further support global markets, even as US inflation remains near-goal. If they don’t, the devil will be in the details as contained in the dot plot matrix and just how many cuts the Fed is looking at by the end of this year.
If the bank does disappoint by forecasting two or fewer hikes by the end of the year, the areas of focus will likely be stocks and Gold and risk aversion themes come become interesting again. If the Fed delivers – look to the topside in pairs like EURUSD and perhaps even GBPUSD as longer-term shorts get squeezed by a sinking Dollar. This could also support continued bullish theses in Gold to go along with the expectation for stocks to re-test their all-time-highs.
On the below chart of the S&P 500, a recent range has developed last week as the US Dollar recovered. If the Fed disappoints, traders are likely looking at a re-test of the 2850 area ahead of a big batch of support around 2812-2816 followed by a batch of support potential around 2800. If the Fed does deliver, look for another press beyond the 2900 level as the all-time-high comes back into focus.
S&P 500 Four-Hour Price Chart
Chart prepared by James Stanley
To read more:
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— Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX