Summary: The US Dollar trades at critical support and resistance levels against major counterparts ahead of tomorrow’s Fed meeting. Why is it important and what can we expect?

- US Dollar at critical technical levels ahead of US Federal Reserve policy meeting

- 72 of 77 analysts/economists polled by Bloomberg News expect Fed to Taper QE

- Critical to watch reaction out of US Treasury Yields as correlation to Dollar remains strong

The US Dollar continues to trade near critical technical levels versus the Japanese Yen, and tomorrow’s US Federal Open Market Committee (FOMC) meeting promises big moves across Dollar pairs and the USDJPY in particular. Why?

A Bloomberg News survey shows that 72 of 77 analysts and economists polled believe the FOMC will Taper its Quantitative Easing purchases through tomorrow’s meeting. A disappointment or surprise could have a significant effect on markets, and this is especially relevant as USD pairs trade at major levels.

USDJPY Trades at Potentially Game-Changing Price Levels Ahead of FOMC Meeting

forex_-_US_Dollar_at_Critical_Levels_Ahead_of_Fed_Meeting_body_Picture_5.png, Dollar at Critical Levels Ahead of Fed Meeting - What to Expect

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez

To see what kind of effect this could have on the Dollar, we look to a critical part of Fed strategy: buying US Treasury debt and keeping yields artificially low. All else remaining equal, current QE policy is bearish for yields and the so-called Taper is bullish. Thus if the Fed fails to Taper by at least $10Bn we could see a substantial move in yields.

A strong correlation between the Greenback and Treasuries underlines the significance of watching reactions to Fed data.

US Dollar/Japanese Yen Exchange Rate Moving Virtually Tick-for-Tick with Treasury Yields

forex_-_US_Dollar_at_Critical_Levels_Ahead_of_Fed_Meeting_body_Picture_6.png, Dollar at Critical Levels Ahead of Fed Meeting - What to Expect

Data source: Bloomberg, Prepared by David Rodriguez

Given such one-sided market sentiment heading into tomorrow’s Fed meeting, we think there’s material risk of disappointment. This is especially true given the fact that yields are currently trading below major support levels and poised for further declines.

US 10-Year Treasury Yield has Failed at Key Resistance and Looks at Risks of Declines

forex_-_US_Dollar_at_Critical_Levels_Ahead_of_Fed_Meeting_body_Picture_7.png, Dollar at Critical Levels Ahead of Fed Meeting - What to Expect

Data source: Bloomberg, Prepared by David Rodriguez

All in all it seems as though there are considerable downside risks to the US currency. Our Senior Strategist points out that the USD trades at a potentially pivotal cycle window versus the Euro, while he highlights the significance of nearby USDJPY price levels.

It will be critical to watch price action following the Fed meeting as it could determine trends through the foreseeable future. Follow any updates on the US Dollar and other currencies via this author’s e-mail distribution list.

Forex Correlations SummaryView forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

forex_-_US_Dollar_at_Critical_Levels_Ahead_of_Fed_Meeting_body_Picture_8.png, Dollar at Critical Levels Ahead of Fed Meeting - What to Expect

Data source: Bloomberg. Chart source: R SEE GUIDE ON READING THE ABOVE CHART

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX


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