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

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US Dollar Points of Interest:

  • The U.S. dollar was a freight train in April, exploding to recent 19-year highs.
  • Tomorrow brings a Federal Reserve rate hike, which carries massive expectations, seeking to get the bank to raise rates while announcing plans for the balance sheet. The Fed is extraordinary among global central banks and that is what has helped this extreme shift in price-in to markets.
  • The analysis contained in an article depends on price action and diagram formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

Almost three trading days have passed since the US dollar set a fresh annual high. And, of course, this leads to a potential pullback considering how extreme the move was price through April trading. But, tomorrow brings that next big driver with the FOMC for the May tax decision and here it is expected that the bank will raise rates by 50 basis points while also communicating its plans with the balance sheet.

And, of course, this puts the Fed in a pretty extreme position right now, especially considering where other Central Banks are in their migratory cycles. From recent ECB and BoJ meetings, it seems that there are no rates in the equation coming soon there and due to the size of each of those equivalents that put more pressure on the USD, especially considering the allocation that each of the Euro and Yen has in . the DXY quote.

But, on the tone of keeping pace with the Fed, or at least getting a little, we heard from the RBA last night with a surprise rate. They raised rates by 25 basis points largely in response to higher levels of inflation; moves the Fed is likely to wish they had embarked on last year. But, the RBA made the move last night and already AUD / USD pushed rapidly higher. And, there may be hope for a continuation, as short-term charts show a support object around previous resistance – which keeps the door open because this is a higher-low that could possibly enter another bullish trend, similar to what was seen. back in February.

AUD / USD Two-Hour Price Chart

audusd price chart

Diagram prepared by James Stanley; AUDUSD on Tradingview

US dollar

One of the more difficult parts of markets often separates what is priced from what is not yet. It’s a constant game of cat and mouse, and when we have something on the calendar like we have for tomorrow, with a long-awaited FOMC move, and there’s a wide range of possible expectation on how price might react due to the various scenarios.

But – that isolation I mentioned earlier, in which the Fed is looking at a fairly extreme outpouring in the coming months while the major Central Banks in Japan and Europe are not, well that can lead to sharp shifts in currency markets.

Because currencies are the basis of the financial system – there is no other way to value a currency than using another currency. So, to be sure, there was a bullish bias in the US dollar on the back of higher rates. This is what we are following in the USD forecast for one year. But, in the FX market, adding weakness in Euro or Yen on the basis of loose policy of those Central Banks, it can really suck the move in the USD as it has.

And as we sit in front of that important driver just over 24 hours away, the U.S. dollar has already jumped to a recent 19-year high. This happened last Thursday and since then there has been quite a bit of back and forth, as shown on the daily chart below.

US Dollar Day Price Chart

USD Daily Price Chart

Diagram prepared by James Stanley; USD, DXY on Tradingview

The US dollar has already seen an extreme move, a price in those expectations around the FOMC. The big question here is, what more can they say to force buyers to rush into the USD to push fresh highs? I’m not discounting this option, but I’m legally curious.

In typical cases of this nature, withdrawal will often be in order. The simple prospect of the Fed not continuing the extreme change could be enough to cause a profit, which could then create recent short-term lows, thus forcing more to sell. This can happen until we reach a certain equilibrium point at which buyers want to bounce back into the market. And, usually, a point of previous resistance is an attractive reference. But, considering the veracity of the initial move, there aren’t many points of previous resistance nearby. We have to go up to the 101 handle for a swing high from two weeks ago to even find the last short-term retreat.

So, some creativity may be needed here in plotting for support potential. There is a Fibonacci level around 102 that is interesting; and the 101 level is below that. Between current price and 102, there is a rapid swing around 102.80 that came in last Friday and this could be viewed as an aggressive spot of near support in the USD.

Four-hour price chart of US dollar

Price chart of four hours of US dollar

Diagram prepared by James Stanley; USD, DXY at Tradingview

EUR / USD

Along with that extreme move in the USD was the mirror image of that issue in EUR / USD, which has recently absolutely melted away. Inflation has not taken hold in Europe to almost the same degree as the United States, so the impetus for the ECB to become more hawkish is not yet entirely there. And, combine war on the eastern border and there’s a lot to worry about around the Euro.

The pair were crushed in late April to drive up to recent two-year lows. But, that move has since begun to build support around the 1.0500 handle, which has helped set up support since last Wednesday.

Buyers are currently pushing back, and this opens the door for a test of Friday’s high at the Fibonacci level of 1.0592. Above that, there is a forward wing low at 1.0637 after which another forward swing comes into the picture at 1.0695. If buyers can really force a withdrawal, the level at 1.0767 could serve as a form of invalidation of the bearish issue by opening the door for a larger withdrawal.

Four-hour Price chart of EUR / USD

Euro price chart

Diagram prepared by James Stanley; EURUSD on Tradingview

USD / JPY

USD / JPY is similar in the middle of an extreme move and the divergence between representative Central Banks is probably more shown here than even with the EUR / USD situation. The Bank of Japan continues with very loose monetary policy spending and while the Fed has changed, that divergence has only grown. This move has been building since early March, when the pair was around the 115.00 level. It lasted almost until April, as prices got involved with the 130 level.

And, so far, withdrawals have been tiny. And very neat, because every recent withdrawal episode has simply pushed back to maintain previous resistance before launching higher again.

We’ve already had an episode of recent resistance coming in as support and that’s at 129.41. That kept the low last Friday, and at this point, it remains as a support potential in the pair.

Daily Price USD / JPY

usdjpy daily price chart

Diagram prepared by James Stanley; USDJPY on Tradingview

— Written by James Stanley, Chief Strategist by DailyFX.com

Contact and follow James on Twitter: @JStanleyFX



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