U.S. dollar rally

Welcome to a new trading week.

The U.S. dollar continued trading higher against other major currencies in the wake of a hawkish shift by the Federal Reserve. Fed official James Bullard said inflation risks may warrant an earlier rate increase than penciled in by many of his colleagues. Bullard also said that the Fed has started discussing tapering asset purchases.

Traders will therefore pay attention to the appearance by Fed Chair Jerome Powell at a hearing on Tuesday for any guidance on tapering asset purchases.

While this week is a light trading week in terms of economic data, the focus will be on Fed speak throughout the week and the Bank of England interest rate decision on Thursday.

As for the Bank of England’s monetary policy decision, policy makers are likely to vote unanimously to keep interest rates on hold at 0.1 percent while economists expect an 8-1 vote in favor of keeping asset purchase unchanged. It will be the last rate decision for BoE’s Chief Economists Andy Haldane who steps down this month. Haldane is the BoE’s most outspoken contrarian and inflation hawk and his removal could see a more dovish tone at future BoE meetings.

EUR/USD

The euro broke below 1.19 and is now on its way towards 1.18. The U.S. dollar rally has pushed the pair into oversold territory, which is why we anticipate small rebounds towards 1.1950 and possibly even 1.20, provided that 1.18 holds. In case of a break below 1.1790, traders will have to shift the focus to lower support areas at 1.17 and 1.16.

GBP/USD

The cable has cleared the ascending trendline of its latest uptrend channel and its support around 1.40. Whether we will see a follow through of the bearish move is not clear and could hinge on the BoE’s decision on Thursday. We note that the pair entered oversold territory, making pullbacks more likely, but perhaps not before testing the next support zone between 1.3660 and 1.3450. Current resistances are seen at 1.39 and 1.40.

DAX

The Fed’s hawkish pivot has sent stocks tumbling and so did the DAX. This morning we see the index testing its last ascending trendline at around 15300. A sustained break below 15300 could lead to further losses towards the support zone between 15000 and 14800.