USD price action settings: EUR/USD, GBP/USD, AUD/USD, USD/JPY

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    Topics of conversation about the US dollar:

    • The US dollar rebounds from merged support ahead of tomorrow FOMC rate decision.
    • The Fed is expected to hike by 75 bp, but the bigger question is what else was said at the press conference regarding future hikes in September and beyond.
    • The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education separation.
    • The quarterly forecasts were just released from DailyFX and I wrote the technical part of the US dollar forecast. For the full text, click on the link below.

    Tomorrow is the Fed, but you probably already know that. And you also probably already know that there’s a lot of expectation for a 75 basis point hike here, and if that doesn’t happen, there could be some excitement elsewhere. If the Fed is too easy, there will be a lot of questions about their commitment to fighting inflation or, perhaps more worryingly, what does the Fed see holding them back from doing so? On the other hand, if the Fed were to increase by 100 bps, we could see the shocks that have shown a few weeks ago, as the markets expected. This was made up on Thursday and Friday (July 19).thousand/20thousand), when FOMC speakers denied the prospect.

    But inflation remains aggressively high, and so far the Fed’s rate hikes haven’t shown much of an impact on the issue. However, rate hikes usually take time to trickle down, and the Fed only started hiking a little over four months ago, so we’re still in the early stages. And that’s why central banks may want to be hawkish when inflation is overshooting the target, because when inflation takes on a life of its own, it can be difficult to deal with, as it was in the 1970s.

    Treasury rates have been falling recently, with many pointing to inflation possibly having peaked, and the bond market is reflecting that message. But one look at the yield curve adds some context, because while yes, rates are falling, it’s also happening unevenly, and right now the 2/10 yield curve is the most inverted in 20 years.

    This is not a positive signal for future growth: As rates rise at the short end of the curve, spurred by Fed hikes, investors are moving up the curve to go long in Treasuries. The simple act of buying Treasuries at current rates opens up the potential for capital gains if rates fall further. So essentially, as the Fed raises rates, market participants appear to be betting more and more on some sort of economic driver ahead, as evidenced by this strength in longer-dated Treasuries.

    Illustrating this theme, the 2/10 yield spread, or the difference between the two-year and ten-year Treasury yields, has reversed and is at its lowest level since November 2000.

    The US yield curve spread between two- and ten-year Treasuries

    I prepared the diagram James Stanley; data from Tradingview

    This means that two-year Treasuries are currently yielding more than ten-year Treasuries, currently around 26 basis points.

    So ask yourself – why would an investor take on a 10-year risk at a lower rate of 0.26% as of this morning, as opposed to a higher rate with a shorter duration of risk? It would be like walking into a bank and asking for a 10-year mortgage and then getting a higher rate than if you took out a 30-year mortgage. Which bank can offer this? Probably none, because a longer term carries more risk, which would have to be offset by a higher interest rate.

    If that doesn’t happen in the markets – like what’s being shown right now – it’s an extreme distortion, and again, it’s likely to be driven by investors and funds buying longer Treasuries in anticipation of a possible move to lower rates that could be triggered by worsening economic conditions. conditions.

    US dollar

    The US dollar is in a special position at the moment. The currency was not only subject to higher interest rates, which would be the traditional driver of the exchange rate resulting from rate divergence. But there is also the possibility of harbor flows as the clouds over Europe darken.

    Therefore, it may be a rare situation where the shelter is also a more profitable currency, and this will add to the prospects to the appreciation of the US dollar over the past year and, more importantly, over the past six months how the Russian-Ukrainian scenario continued.

    On a short-term basis, the US dollar is currently trying to hold support above the lows. This showed at the merged point on the chart as a bullish trend line and 38.2% Fibonacci retracement plotted around 106.24. This may focus attention on themes of the continuation of the bullish trend in the USD.

    Daily US Dollar Price Chart

    USD daily chart

    I prepared the diagram James Stanley; USD, DXY on Tradingview

    EUR/USD in the field

    EUR/USD is currently in a forming a rectangle and this is something that often manifests itself around consolidation. A rectangle or square is usually approached with a breakout objective and this morning saw the downside of this block tested at 1.0120, with wicks that emphasize the response at this level. For bullish USD themes, bearish euroThe /USD positions are likely to be a large part of this approach.

    More broadly, the question is what might happen in Europe in the second half of this year. with Natural gas prices are quickly jumping to new highs, and the current scenario between Russia and Ukraine is not improving, there is a risk of a worrisome winter in Europe with energy rations along with a sharp rise in energy prices.

    Europe is already struggling with inflation and ECB just started raising rates to solve this problem. But energy prices are an uncontrollable variable here, and higher energy prices may persist even with higher rates.

    But, if the ECB does not hike again, there is a greater risk of the euro losing value, which could add to these inflationary pressures. So the ECB seems to be really locked in here: they need to walk the walk to try to deal with inflation and keep the euro from collapsing, but on the other hand, they need to tread carefully for fear of stifling whatever growth remains. And then, when all is said and done, Europe could have an energy crisis this summer.

    Taken together, this is why the single currency has struggled to hold support recently, reaching EUR/USD parity for the first time in almost 20 years.

    For now, the rectangle is set, and the bearish breakout exposes the parity level for another test. On the other hand, in the event of a bullish breakout, potential resistance exists at the previous low of 1.0340.

    Four-hour EUR/USD price chart

    four-hour chart of the euro

    I prepared the diagram James Stanley; EURUSD on Tradingview

    GBP/USD

    Cable’s near-term price action looks messy to me. When I looked at a couple two weeks ago was a falling wedge formation that was being adjusted. Such formations are often used for the purpose of bullish reversals, and it started to show last week.

    Since then, prices have rallied to the 1.2090 resistance level and continued to build both higher lows and higher highs. now, GBP/USD seems to be in the process of trying to protect 1.2000 psychological level.

    The difficulty with bullish themes at the moment would be the lack of bullish breakouts near highs or resistance. It allows in the initial stages of a the wedge rises into a shape that is the mirror image of a two-week-old falling wedge and is usually drawn for the purpose of bearish reversals.

    Four-hour GBP/USD price chart

    gbpusd four hour chart

    I prepared the diagram James Stanley; GBPUSD on Tradingview

    AUD/USD

    AUD/USD also broke out of the recent falling wedge formation, although the setup in the AUD/USD was slightly more long-term than what was discussed above GBP/USD.

    The falling wedge in AUD/USD was building from mid-June to mid-July, and a breakout from the formation was indicated last Monday. And, initially, there was some sharp rally in the pair that pushed the price towards the big 0.7000 figure.

    However, price dynamics over the past few days have been particularly “sharp” with little direction. On the daily chart below, pay attention elongated wicks on either side of the candles over the past few days. This indicates the direction the market is looking for and opens the possibility for either a test of support at 0.6854 or a test of resistance at 0.7000.

    Given deviations from EUR/USD or even GBP/USD higher, AUD/USD may favor bearish biases against the US dollar or pullback themes around the dollar’s FOMC meeting tomorrow.

    AUD/USD Daily Chart

    daily schedule audusd

    I prepared the diagram James Stanley; AUDUSD on Tradingview

    USD/JPY

    USD/JPY grasping for support. The Bank of Japan meeting last week did not bring any significant changes to the Bank of Japan. nevertheless She– Since then, the weakness has subsided, which raises the question of whether markets are starting to price something else, or whether there is an expectation of an eventual change.

    In USD/JPY, the price remains at the support level, guided by bullishness trend line, but buyers have yet to push above the short-term resistance charted around 136.70-137.00. It’s deeper there support in the zone of 134.48-135.00.

    For traders looking for yen strength strategies, EUR/JPY or perhaps even GBP/JPY could be of some interest.

    Four-hour USD/JPY price chart

    usdjpy four hour chart

    I prepared the diagram James Stanley; USDJPY on Tradingview

    — The author James Stanley, Senior strategist for DailyFX.com

    Contact and follow James on Twitter: @JStanleyFX

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