Currency Traders Brace For Central Bank Activity

The U.S. dollar is trading steady-to-higher overnight in light volume as Forex traders appear to be heading to the sidelines ahead of the start of a two-day U.S. Federal Reserve policy meeting ending on August 1. Later in the week, the European Central Bank and the Bank of England will announce their latest monetary policy decisions on August 2.

Although all three central banks are expected to keep their respective benchmark interest rates at historically low levels, traders will be looking for clues as to the timing of the next round of economic stimulus. Last week, the dollar took a hit after comments by ECB President Mario Draghi boosted interest in the euro. This also fueled demand for higher risk assets sending other currency markets higher versus the dollar as well as global equity markets.

Daily September U.S. Dollar Index

After posting a new high for the year at 84.245 early last week, the September U.S. dollar futures contract broke sharply, turning the main trend to down, and setting up the contract for further downside action.

Currently, the market is straddling the 50% price level at 82.818 created by the 81.39 to 84.245 range. If a support base is established near this price then traders should watch for a near-term retracement to 50% of the break from 84.245 to 82.40. This price is at 83.323. Since the main trend is down, traders should watch for selling pressure to emerge in the retracement zone.

The chart also indicates that a break through 82.40 could trigger an acceleration to the downside since the next downside target is another 50% price level at 81.635.

Daily September Euro

Critics of ECB President Draghi’s bold vow to do whatever it takes to preserve the euro helped drive the single-currency down on Monday. Traders aren’t expected to move the September euro much ahead of the ECB’s meeting on Thursday, but if the Fed delivers news of additional stimulus the day before then a plunge in the dollar should drive the euro higher.

Technically, last week the September euro stopped short of completing a 50% retracement of the 1.2759 to 1.2051 range. The target was 1.2405. The market stopped at 1.2397. This helped form a new short-term range of 1.2051 to 1.2397 and a new retracement zone at 1.2224 to 1.2183. This area is expected to be tested over the short-run. Additional support is being created by an uptrending Gann angle at 1.2251, followed by 1.2151.

Last week the main trend turned up on the daily chart when the market crossed 1.2335. Since the main trend is up then traders may step in to buy a break into the retracement zone at 1.2224 to 1.2183. If buyers can stop the break then a secondary higher-bottom could form, signaling the start of another rally.

Daily September British Pound

On Thursday, August 2, the Bank of England meets to decide its next monetary policy move. There is a consensus building that suggests the central bank may implement additional quantitative easing. This news could pressure the September British pound, but by how much will have most likely been decided by the Fed’s action the day before.

The daily September British pound chart suggests the Sterling may be poised to breakout to the upside once a series of tops is violated. Although there is a major 50% price level at 1.5771, it looks as if traders are well aware of this price and likely to drive right through it, setting up a test of the 61.8%, or Fibonacci price level at 1.5890.

Although there is a slight bias to the upside building, weakness in the British pound could develop, sending the market into a retracement zone created by the 1.5456 to 1.5767 range. This area is defined as 1.5612 to 1.5575. Since the main trend is up, buyers may be attracted to the long side following a test of this zone. With a series of higher tops and higher bottoms developing, a new secondary higher-bottom will be a bullish sign.

The Forex markets may be quiet over the next two days ahead of the Federal Open Market Committee Meeting on August 1. Traders will be looking for signs that the central bank is gearing up for another round of quantitative easing. On August 2, traders will be looking for the same action by the European Central Bank and the Bank of England. If no decision is reached regarding additional stimulus then the U.S. dollar may resume its long-term uptrend. Since the main trend is down on the daily chart, it appears that traders are banking on the Fed to lean toward additional stimulus. The date of such action is still uncertain. This could lead to increased volatility.