The U.S. dollar posted a disappointing performance on Friday, following U.S. labor market data which was actually not too bad. The only indicator that came in shy of the expected number, was the average hourly earnings which grew 0.2% instead of the expected 0.3%. The nonfarm payrolls number was really good at 235,000 new jobs while only 200,000 was expected.

The weak dollar reaction to the relatively good economic data suggests that the recent dollar rally might have become somewhat exhausted. This should be no surprise to us because it is a well-known fact that investors and traders front-run events like these, pricing in the event long before it actually happens. Of course, they will rarely price in an event with absolute accuracy. The FX market is full of overreactions to many different events. Human beings are emotional, which causes much irrational behavior in the trading world.

The question is not really whether the FED will hike this week, but whether it will be a “dovish” or a “hawkish” hike. The probability of a rate hike this week is basically 100% which means that market players have already become accustomed to the prospect. The whole investing world knows that the FED will hike this week. But what they don’t know, is what the projection for further rate hikes will look like, whether Janet Yellen will retain her hawkish stance at Wednesday’s meeting, and what kind of info we’ll see in the FOMC statement which is released at the same time as the rate decision. The rate announcement and the FOMC statement will hit the wires at 18:00 GMT and Janet Yellen’s speech is at 18:30 GMT.

US Dollar Index – Correcting Lower

The US Dollar Index is a composite of U.S. dollar strength against a basket of four major currencies namely the Australian dollar, Euro, British pound, and the Japanese yen. It gives us a good idea of the general strength of the U.S. dollar. Here is a daily chart:

US Dollar Index Daily Chart

Although this isn’t a major correction, it should concern traders with long U.S. dollar exposure. It certainly doesn’t portray tremendous dollar strength. Much of this decline is fueled by the bounce in the EUR/USD, of course. Let’s look at the EUR/USD:

EUR/USD – The Bulls Won’t Give Up

EUR/USD Daily Chart

This recent bounce in the EUR/USD has certainly flushed out many sellers from the market. The ECB president Mario Draghi’s hawkish comments last week attracted much buying to this pair, as well as other euro pairs. Let’s look at a monthly chart:

EUR/USD Monthly Chart

The EUR/USD has been trading in a wide range spanning about 1000 pips. This most recent euro pop will likely keep the price firmly in this range for a good while. It looks like we could see some bullish follow-through in the next couple of weeks. If the FED displays some dovishness this week, and in the weeks to come, this scenario would become even more probable.

GBP/USD – At Soft Support

GBP/USD Daily Chart

It isn’t difficult to recognize the range-bound price action on the GBP/USD. The pair has recently sold off quite aggressively. The recent doji candles on this daily chart suggest that the bears are taking a break, however. Sellers might want to wait for a retracement entry before entering this market again.

The pound is really weak at the moment and has recently performed poorly against most other currencies. The U.K. faces many challenges at the moment and so does the pound. The Brexit matter is, of course, the greatest threat to the pound at the moment.

With all that said, if we consider how strong the euro has lately been, and how weak the pound has been, why would we not pair up these two currencies for a long trade? Let’s look at the EUR/GBP:

EUR/GBP – Burning Rocket Fuel!

EUR/GBP Daily Chart

The EUR/GBP is rocketing higher at a supersonic speed. The recent bounce in the euro and the dip in the pound has caused an incredible rally in this pair. This move has been relatively easy to trade. For 10 days out of 11, this pair has traded higher – unbelievable!

This pair has traded right up to the point where it is definitely overbought. This should by no means alter our bullish bias, but perhaps we could get a better entry in the weeks to come.

I will definitely keep an eye on the lower timeframes as well because the pair could easily drop some splendid buy signals there without forming a notable retracement on the daily chart. This is what I did last week and I was handsomely rewarded by the powerful bullish momentum which followed.

Gold – Really Heavy!

The gold price has declined heavily during the last couple of days. The technical outlook is very bearish at the moment, but gauging by Friday’s bullish candle we might want to wait for a higher price to go short again. Here is a daily chart:

Gold Daily Chart

The ideal entry would be closer to the 20-EMA. This commodity is definitely on my radar at the moment. I’d like to see a bearish candle rejecting off of the mean value (20-EMA) somewhere in the next two or three weeks. This would be a splendid trigger for a short position.

AUD/USD – In Bearish Territory

The AUD/USD has been subject to strong selling in the last few trading days. Although the U.S. dollar corrected lower on Friday, this pullback has not benefited the AUD/USD much. Look at this daily chart:

AUD/USD Daily Chart

I opened some short trades on this pair on 28 February. I’m still letting them run because it looks like we’re going to get a lot of mileage out of this decline.

I reckon we might get a weak bounce in the next few days followed by an aggressive decline. Of course, we don’t know what will happen on Wednesday, but perhaps we won’t get much action. Traders normally expect massive market movements from important events like this FED interest rate decision, but sometimes these events only cause much sideways chop.

Other Events

The BOE (Bank of England), SNB (Swiss National Bank) and the BOJ (Bank of Japan) also have their interest rate decisions this week. Not much is expected from these decisions, however. It doesn’t mean we shouldn’t watch out for them, though.

Hope you enjoy a profitable week!