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Dollar Drop Creates a Series of Setups

The US Dollar has finally found some element of resistance after what had become an aggressively bullish three-week run. While March inflation numbers surprised to the upside when they were released in April, it took about a week for USD-bulls to get kicked into action. This happened around the release of UK inflation numbers, and as a bearish reversal started to show in GBP/USD, the US Dollar began to tick-higher. This theme of Dollar-strength hastened a week later at the European Central Bank rate decision. This is when Mario Draghi had the backdrop of slowing growth and inflation in the European economy, and this helped the bank to take a dovish outlook to markets. While we came into the month of April with very real expectations for a rate hike out of the BoE in May, along with a stimulus exit out of the ECB in September; those odds deteriorated throughout the month, and this deductively drove the Dollar-higher as rate hike bets got kicked further into the future around the Bank of England and the ECB.

That Dollar strength remained as a near-constant as we came into this week, and on Thursday we got the release of April inflation numbers. While inflation in the US remains brisk and above the Fed’s target on both headline and core CPI reads, the upside surprise from last month was not there as both of these points printed at-or-below-expectations. That has helped that prior theme of USD-strength to calm, and as we move into next week, the prospect of a weaker-Dollar remains.

Below, we look at setups on either side of the Greenback; each of which is designed for next week. It’s important to note that weekend gaps can vastly alter the nature of a setup, as a gap through support or resistance can completely change the dynamics of what we’re looking at.

Bullish GBP/USD on Hold of Long-Term Support

We looked at this setup to open this week, and while prices didn’t break higher around this week’s Bank of England rate decision; the fact that they did not break-down through support can be seen as a deductively bullish item. At this point, we have a bullish RSI signal on the GBP/USD Daily chart, and the pair has spent a week grinding at this long-term area of support. As we wrote earlier this week, the price of 1.3500 has a semblance of historical value to the pair, and just below that are a couple of other items of support: At 1.3478, we have the 50% retracement of the ‘Brexit move’ and at 1.3458, we have the 2018 swing-low in the pair.

Even after this week’s dovish Bank of England rate decision, that 2018 low remained respected. While many were saying that the ‘Pound plunged’ around that meeting, the fact of the matter is that Cable saw a simple revisit to support which, at this point, has held up.

This keeps the door open for topside reversal setups, with stops below the 2018 swing low of 1.3458, and targets directed towards the same areas that we looked at last week of 1.3660, and 1.3750.

Do you want to see how retail traders are currently trading GBP/USD? Check out our IG Client Sentiment Indicator.

GBP/USD Daily: A Week of Grind at Long-Term Support

gbpusd daily chart

Chart prepared by James Stanley

Bear Flag in EUR/USD, 1.2000 Resistance

While that US Dollar surge was taking place, EUR/USD remained within an aggressively-sloped bearish channel; only finding a bit of support this week around the 1.1825 level. That synced well with the Dollar probing at resistance, and as that USD pullback has continued, a bullish channel has begun to build within EUR/USD.

But – the move still appears corrective in nature, as we’ve seen resistance show off of the 23.6% Fibonacci retracement of that recent sell-off. This highlights bearish continuation potential, and just a little higher on the chart is a very interesting area to use for such an approach. This is the 1.2000 psychological level, and prices breached through last week.

At this point, resistance at the 1.2000 level can be used to setup short-side approaches; enabling stops to be placed above the 38.2% retracement around 1.2044, with targets directed towards 1.1900 and then 1.1825.

Do you want to see how retail traders are currently trading EUR/USD? Check out our IG Client Sentiment Indicator.

EUR/USD Hourly Chart: Building Bear Flag Towards 1.2000 Potential Resistance

eurusd hourly chart

Chart prepared by James Stanley

Bullish USD/JPY on 110.00 Re-Test

We looked at this setup in yesterday’s webinar, and given that we have Japanese inflation data on the docket for next week, Yen-themes can remain in focus. The initial setup here would be shorter-term in nature; but there’s potential for the trade to be managed with a longer-term outlook.

Prices are currently finding support at the 38.2% retracement of the 2015-2016 major move in the pair, and this takes place around 119.20. At 108.62, we have last week’s swing low and at 110.00, we have last week’s swing-high. This opens the door for a topside setup with a stop of approximately 60 pips to an initial target of approximately 80. The real allure in this setup is in the event that the 110.00 level is taken out in a bullish breakout, which could open the door to significantly more topside. Secondary profit targets can be set to 110.75 and/or 111.50.

Do you want to see how retail traders are currently trading USD/JPY? Check out our IG Client Sentiment Indicator.

USD/JPY Four-Hour Chart: Price Holds Fibonacci Support

usdjpy four hour chart

Chart prepared by James Stanley

Bullish AUD/USD for Continued Reversal Potential

Going along with the US Dollar’s evening star on the Daily chart was a morning star in AUD/USD. This showed in the pair’s price action from Tuesday, Wednesday and Thursday, and so far on Friday that move has followed through.

Going along with that formation was a break back-above a key level of .7500. If this US Dollar trend is going to further unwind, the topside of AUD/USD can be a fairly attractive place to be. After that formation built-in yesterday, prices have moved on to set fresh May highs; and just ahead of that we saw a quick higher-low around .7521. This can be used for bullish continuation scenarios, with traders looking to catch support in the area that runs from the .7500 big figure up to that .7521 area. This can allow for stops below .7450, with initial targets cast towards .7600 and secondary targets up to .7680.

AUD/USD Hourly Chart: Bullish Potential After Completion of Morning Star Formation

audusd hourly chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX