The major headlines of last week with regard to the Fed keeping interest rates unchanged have come and gone. Where has this left us with the US dollar and the major currency pairs? While the market reaction to the news last week and the uncertainty it caused prompted a plunge for global stocks, crude oil, and the dollar, along with a corresponding surge for gold, the US dollar quickly pared much of those losses as it shrugged off the Fed’s September hold on interest rates.
For EUR/USD, this meant that although the currency pair initially shot up to edge slightly above key resistance around the 1.1400 level, Friday saw an equally dramatic fall that gave back all of those gains as the US dollar once again showed its resilience.
This positions EUR/USD once again within a relatively solid trading range that has been in place for the past five months. Despite a sharp rise in late August that pushed the currency pair up to a seven-month high slightly above 1.1700, EUR/USD quickly corrected that surge and fell back under the noted 1.1400-area resistance, which has now been reinforced as a major resistance area.
Currently, the new trading week began with a further rebound for the dollar, with EUR/USD continuing its fall from 1.1400-area resistance and back down to a short-term uptrend support line extending back to early August.
With an upcoming Fed rate hike potentially still in play by the end of this year against a dovish ECB, EUR/USD still has plenty of potential room to the downside to resume its longer-term trend which extends back to May of last year.
If the currency pair continues to trade under the 1.1400 resistance level, and especially with any breakdown below the noted short-term uptrend line, the clear downside target continues to be at the 1.1100 support level. With any breakdown below 1.1100, the next major target resides at the key 1.0800 support area, last retested in July.
For USD/JPY, last week’s Fed drama was particularly market-moving, as the simultaneous drop in the dollar and stocks led to what appeared to be a knee-jerk flight to the Japanese yen. This prompted a tentative breakdown below both the 120.00 level and a short-term uptrend line extending back to the late August low just above 116.00. Friday’s dollar rebound, however, helped to pare those losses and led to a USD/JPY climb back to 120.00.
USD/JPY has been driven in recent months partly by the Japanese yen’s reactions to volatility in the global equities markets, as investors tend to flock towards the relative safe haven of the yen in times of market turmoil. The Japanese currency has risen and fallen in fairly close correlation with equity indices, as stock markets have experienced increased volatility as of late.
The new trading week, however, has brought a tentative and cautious recovery from last week’s plunge in the equity markets and a noted rebound for the US dollar. This has prompted a Monday morning rally for USD/JPY that has pushed the currency pair further above 120.00.
Despite the postponement of a Fed rate hike, much further downside for USD/JPY should likely be limited by continued market expectations of a near-future rise in US interest rates. With that being said, however, any substantial resumption of stock market volatility could also lead to another sharp plunge for the currency pair, similar to what was seen in late August.
In the event of such a flight-to-safety drop back below 120.00, USD/JPY should then begin making its way back down towards the 118.00 support level, with any further breakdown targeting the 115.50 support area.
To the upside, any sustained trading above 120.00 should be limited by major resistance around the key 122.00 level.
From time to time, 2021 StoneX Financial Ltd’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.