Pre-Fed Price Action Favors GBP/USD Breakout, EUR/USD Outside Bar

Talking Points:

- USDOLLAR loses key support below 10477.

- GBPUSD breaks to yearly high, EURUSD yawns.

- Forex economic calendar sees US confidence data cap the week.

The USDOLLAR Index (equal-weighted basket of US Dollar long versus Australian Dollar, British Pound, Euro, and Japanese Yen short) has broken through a pivotal level from the past three months, leaving the greenback vulnerable headed into next week's Federal Reserve's June policy meeting.

There may be concern developing, given the explosive rally seen in US Treasuries yesterday (higher prices means lower yields), that the Fed could reassess its economic outlook so that it is once again perceived that interest rates will stay lower for longer. The June economic projections come as the unemployment rate is at 6.3%, right at the Fed's upper bound expectation for the end of the year; we're not yet fully halfway through.

The current juxtaposition between the Bank of England and the Federal Reserve couldn't be more pronounced in the short-term, and the Sterling has been able to take advantage of the thinner conditions and weak dollar sentiment, with GBPUSD breaking out of its May 6 to May 22 downtrend, and encroaching the yearly high set at $1.6996 (high today so far is $1.6990).

What is notable is that, even though EURUSD has rallied, it has been a true laggard in the sense that a) USDCHF is holding elevated territory (significant high correlation), and b) EURUSD is now treating former range support at $1.3585 as resistance. Yesterday's bullish engulfing bar has been met with an inverted hammer today, hardly the sign of decisive bullish follow-through.

Read more: USDOLLAR Back to Familiar Support as AUD/USD, GBP/USD Breakout

--- Written by Christopher Vecchio, Currency Analyst

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