Dovish Fed comments lift stocks, push yields and dollar lower

Fed Governor Christopher Waller offered a notably dovish tone in his early remarks, prompting traders to push bond yields and the dollar down while boosting stock futures. However, with several major forex pairs testing technical zones, the key question becomes whether the current momentum can continue or if support and resistance will pause the moves.

In an interview with Reuters, Waller stated he is 'finally seeing signs of disinflation' and would be 'inclined to leave rates unchanged in September if August’s inflation data shows continued progress.' For those less familiar, disinflation refers to a slower rate of price increases; it does not imply outright deflation. This nuance matters because a reduction in inflation pressure reduces the case for further rate hikes.

Waller also allowed for the possibility of a rate increase should inflation speed up. In other words, his preference is to hold rates steady, but the economic data must align.

Markets reacted to that softer stance:

• US 2-year yield: Down about 7.07 basis points.
• US 10-year yield: Down about 5.5 basis points.
• S&P 500 futures: Up about 25 points.
• Nasdaq futures: Up about 41 points.

What does this mean for foreign exchange? If traders scale back expectations of higher US rates, Treasury yields can drop, which diminishes the dollar's rate advantage. That accounts for the dollar selling seen today. Additionally, falling yields can lift equities by alleviating concerns over borrowing costs and increasing the present value of future earnings.

For the three key forex pairs, a weaker dollar pushes EURUSD and GBPUSD up while dragging USDJPY down. Yet each pair is now encountering a zone where technical resistance or support could stall the move.

USDJPY had already been declining on sustained yen purchases during the Asia-Pacific session and after it broke under its 200-day moving average. The drop has neared 2%, with the day's low at 155.40. That leaves the pair about 18 pips above the August 3 intervention low of 155.218.

Sellers still hold the upper hand, but a prior low provides a potential zone where buying interest may appear. The question becomes what level buyers must recapture to indicate that selling pressure is abating.

EURUSD rose into a resistance zone defined by its 200-hour and 200-day moving averages, spanning 1.16275 to 1.16310. The pair peaked at 1.1630 during the session before running into resistance.

When two prominent moving averages converge, it gives traders a well-defined level to trade against. For buyers, gaining and holding above that region would strengthen the bullish outlook. For sellers defending resistance, a reversal back below 1.16134 is desired, which could pave the way toward the 100-hour moving average at 1.15963.

GBPUSD established support on the previous day at 1.34732, the halfway point of the advance from the late-July corrective trough. After Waller's remarks, today's advance took it to the declining 100-hour moving average at 1.3521, with the pair's session high right at that figure.

That provides another obvious gauge for traders. Holding below the moving average keeps the resistance sellers active. Breaking and maintaining above it would bolster the case for buyers.

The takeaway is that fundamental news can trigger a move, then technical levels guide traders in managing subsequent action. A dovish tone from the Fed has softened the dollar, but sustaining that move depends on overcoming the upcoming technical hurdles.

No one can know for sure whether those levels will hold or give way. What traders can do is pinpoint where their outlook is validated, where it begins to break down, and what the next objective is.