USD Bears Whiplashed by Dollar Reversal

Outlook for US Dollar Price:

• It’s day one of the Jackson Hole Economic Symposium and risk markets opened the event with a wild ride.
• FOMC Chairman Jerome Powell announced a potentially major shift in the bank’s strategy by declaring that they will give employment priority at ‘focused on‘ average inflation ’, apparently opening up to inflation overhoots they should see in the data.
• While such news would often be considered USD-negative, the bears of the U.S. dollar were loudly crushed this morning when an initial breakdown aggressively returned. This marks the potential for the previously discussed theme discussed theme, ask if Bears of the US dollar have capitulated following an aggressive down trend in recent months.
• This article contains pricing action to help spot that potential for capitulation. To learn more about price action, look at us DailyFX Education department.

Jackson Hole opens with volatility

Well, Jackson Hole’s 2020 and Day One has so far not been disappointed, and stay on topic with the madness that has become this year. The Fed announced a potentially major change this morning when President Powell announced a strategic shift at the bank.

While the Fed is one of the notable central banks to have a dual mandate, focused on both inflation and employment, we have recently seen the bank’s grip extend to items such as income inequality and even global warming. But today, they announced what seems to be a priority in the dual mandate they are accused of defending, by announcing that they will focus more on the employment side of their directive, while being more flexible with inflation.

While the Fed previously focused on 2% inflation, it announced this morning that it is now “on average” looking for 2% inflation. ‘ This means that the bank is likely to forgive some with inflation overhoots and assess last month’s inflation data, there is a reason they are using this shift, as the trumps of stimulus launched in the last six months , in fact, something that can create quite aggressive inflation. And given that employment numbers remain poor, the bank did not want to be placed in a place where they had to raise rates in a weak economy simply for the simple reason of controlling price pressures.

The immediate response to this announcement was bullish breakouts in Gold, Silver, Stocks as the USD dived for a quick support test. But that did not last long, as we will move on to the next few charts.

15 Minute Gold Prize: Breakout, snap back at Powell comments

Graphics prepared by James Stanley; Gold on Tradingview

Taking a step back on Gold, and that false breakout speaks volumes about the price action of the morning, and from there, some deduction may help lead in some strategy ideas.

As seen earlier this week, the bigger picture bullish trend in Gold remains on pause as price action erupts around a key support area on the chart. This is the same support zone that was considered earlier in August, just after prices had set a fresh all-time high. But, as also noted in that article, a bright candle of engfulfing appeared, which opened the door for a retreat and that is what helped to turn prices in the first place to support. But in recent weeks, this zone has helped keep the lows from the previous peak of 1920 to the level of 1941.

This morning saw a rapid break on a bearish trendline linking lower highs of the past few weeks, but that breakout could not hold as buyers quickly retreated and support price action fell.

Gold prize of four hours

Graphics prepared by James Stanley; Gold on Tradingview

Perhaps the key to this morning’s swipsaw?

At the core of many of this morning’s reversals is a similar theme in the US dollar, and this is what we have been following for the past few days, as there are growing signals of potential capitulation.

Last week, USD bears looked to a fresh two-year low, but they could not keep moving and could not break fresh ground. The current down trend has been in force for most of Q3, with an aggressive bearish movement driving through July and price action starting to show up so far in August.

But last week’s failed breakdown exposed a fuse under recent support – and just below today’s price action is a potentially important zone of convergence on the US dollar around the 92-hand. This could be a case of USD bears showing sadness after an extended back run USD price action near a critical support zone.

Also of interest for that topic and what we discussed on Tuesday – there are not many other major currencies that now actually look attractive for strength – and if the USD continues to fall – some other major currencies will have to choose the battle. Will that be the Euro as the British pound? Or maybe the Japanese Yen?

At this point, the U.S. dollar remains in a place that may be open to reversals. On the weekly chart below, we can see that four of the past five weeks have shown reactions around the 92.55 level – highlighting the ongoing build-up of support around this price despite the apparent negative background on the currency.

Weekly US Dollar Price Chart

Graphics prepared by James Stanley; USD, DXY on Tradingview

And if we take a step back to the Monthly chart, we can get a better idea of ​​which bears can peel off, because there are multiple reasons for buyers to jump in at each of the support points just below the current price. A trendline linking 2011 and 2014 lows coincides with two different Fibonacci levels around the 92 level.

Monthly US Dollar Price List

Graphics prepared by James Stanley; USD, DXY on Tradingview

— Written by James Stanley, Strategist for DailyFX.com

Get in touch and follow James on Twitter: @JStanleyFX