US Dollar, EUR/USD, USD/CAD Talking Points:

US Dollar Claws Back Last Week’s Losses and Then Some

The US Dollar is continuing to surge ahead of next week’s highly-expected rate cut. While the USD was kicked around last week, breaking down to a fresh two-week-lows on the heels of some interesting comments from NY Fed President, John Williams; the period since has been marked by decisive strength after those comments were walked back. This scenario was looked at in the article, US Dollar Goes Haywire on Fed-Speak Mis-Fire; and the currency continues to gain into this week as buyers are clawing back prior losses.

At the source of last week’s drive was the prospect of a 50-basis point rate cut at the Fed’s meeting next week. This was coupled with the idea of at least 75 basis points of softening ahead of the end of 2019, helping to provide support for risk markets around the world to go along with that drubbing in the US Dollar. This is, perhaps, a case of markets getting ahead of themselves with excitement, expecting the Fed’s initial move into looser policy to prelude additional cuts down-the-road. The Fed at this point appears to be considering this move more as a ‘one and done’ after overtightening last year. With hindsight being 20/20, that December hike last year on the heels of a +10% pullback in stocks doesn’t look so warranted.

After John Williams spoke last week, the NY Fed made the unusual move of ‘clarifying’ his comments after-the-fact, pointing out that he wasn’t specifically alluding to near-term monetary policy and his remarks were more in scope of longer-term research discussions. This item has even caught the attention of President Donald Trump, putting the Fed further in the political crosshairs as next week’s rate decision continues to loom large. Since those comments were walked-back the US Dollar has been on a bee-line higher, rising right back to prior July highs around the 97.50 area.

US Dollar Two-Hour Price Chart

Chart prepared by James Stanley

Taking a step back and the US Dollar is nearing some imposing resistance. The 97.70 level has some history here, as this price helped to set highs in November, December, March and then again in mid-June. Just above that is a confluent zone of Fibonacci levels that runs from 97.86-97.94. And beyond that is the big level at 97.32, which gave a double top in Q2 and, as of yet, has proven a tough level for bulls to beat. The big question is whether USD-buyers might be willing to test this resistance zone ahead of next week’s highly-expected rate cut?

US Dollar Eight-Hour Price Chart

Chart prepared by James Stanley

USD/CAD Re-Testing Resistance at Monthly Highs

Driven by that theme of strength in the US Dollar, USD/CAD has risen to a fresh monthly high. I had looked at the pair for bullish reversal potential coming into this week. USD/CAD had started to test above a falling wedge formation, and sellers seemed disinterested in testing the 1.3000 psychological level. Above current price action, the 1.3200 level remains of interest; and if that USD drive can continue into next week’s rate decision, USD/CAD offers resistance/target potential around prior support of 1.3250-1.3300.

USD/CAD Four-Hour Price Chart

Chart prepared by James Stanley

EUR/USD Tilts Down to July Lows – Can Bears Break-Away?

Going along with that USD-strength is a test through support in EUR/USD. The pair came into the week grasping on to the support zone that’s been in-play in various ways since last November. Buyers had stubbornly held a series of higher-lows as this zone brought bulls into play over the past month. Last week’s rush of USd-weakness pushed the pair up to resistance around 1280; but the corresponding run of USD-strength has pushed prices below this key zone.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley

The ECB may cut rates at their rate decision in a couple of days. A 10 basis point cut would not be out of the question as the ECB President Mario Draghi hosts one of his final rate decisions atop the bank. News around this seemed to matter little last week as US rates were pricing-in a more dovish Fed; but now that expectations have moderated around the FOMC, EUR/USD has been offered-lower.

The big question here is whether bears can break-away ahead of the ECB. Below current price action rests the two-year-low around the 1.1100-handle. For those that do want to press this theme, a short-term pullback to resistance around prior support could re-open the door for bearish trend scenarios. That would offer the potential for relatively tight stops above this week’s swing-high around the 1.1225 area on the chart.

EUR/USD Hourly 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