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USD is Inside the Box: EUR/USD, GBP/USD Showing Divergent Trends

USD is Inside the Box: EUR/USD, GBP/USD Showing Divergent Trends

2016-05-25 13:10:00
James Stanley, Strategist
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Talking Points:

- After the out-sized move higher in the US Dollar in the early portion of May, price action over the past five trading days has been confined to a rather well-defined box; and traders can use this in their setups and approaches.

- While the US Dollar has been confined to a box, we’ve seen two divergent themes develop in EUR/USD and GBP/USD, as EUR/USD broke support as GBP/USD throttled through resistance. Below, we go over how traders can use this in their approaches.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

USD is trading in a Box Pattern: The past five days of price action in the US Dollar have been fairly similar, as the Greenback has struggled to punch through a pivotal resistance level at the 11,960 level on the Dow Jones FXCM US Dollar Index. This is the level that had provided the high two weeks ago, and while getting slight penetration through this resistance level, price action has struggled to surmount further gains beyond this level.

This type of price action will often show when macro themes are fairly priced-in to the market or as we await that next batch of news or motivation to move prices higher or lower. And with more Fed-speak on the economic calendar, this break could certainly occur as we get more information for or against that next potential rate hike in June. This type of price action can also allow for traders to look for breaks in the effort of getting an early entry into that next move that the US Dollar may put in. On the chart below, we’re looking at price action in USD with the past week highlighted as the ‘Box Range,’ and notice that the Fibonacci level that we denoted earlier at 11,960 is serving as the mid-line of this box.

Traders can look for breaks on either side of the box formation to denote potential continuation. And once that break happens, traders can then look to buy a ‘higher-low’ if a top-side break occurs or to sell a ‘lower-high’ should the bottom-side of the box become violated.

USD is Inside the Box: EUR/USD, GBP/USD Showing Divergent Trends

Created with Marketscope/Trading Station II; prepared by James Stanley

For USD-Strength Strategies, Look to EUR/USD

On Monday we asked which would break first, EUR/USD or USD/JPY. Within 24 hours we had an answer, and that was the EUR/USD, as USD/JPY merely found a higher-low and continued with the near-term retracement higher. But EUR/USD put in a break of a rather pivotal support level at 1.1212, and the ‘knock-in’ level that we were looking at 1.1142 was hit to denote a ‘lower-low’ in the pair.

Perhaps more interesting is the move lower that we’ve seen in EUR/USD despite this range-bound price action in the US Dollar. At this point, price action is continuing to hang around the zone of that prior swing low, and with prices sitting so close to near-term support, traders should be cautious of pushing the move. However, should price action find resistance in this zone from 1.1180-1.1212, traders may be able to look for a continuation move lower with stops placed just above the prior swing high of 1.1242. The chart below illustrates the full setup:

USD is Inside the Box: EUR/USD, GBP/USD Showing Divergent Trends

Created with Marketscope/Trading Station II; prepared by James Stanley

For USD-Weakness Strategies, Look to GBP/USD

While EUR/USD has staged a down-side break during this range-bound price action in the US Dollar, we’ve seen a far different tonality out of the British Pound, as this morning has seen another ‘higher-high’ print in the Cable. But just as traders should fear selling a bottom in EUR/USD, the same fear should exist on the opposing side of GBP/USD, as traders should fear the prospect of getting caught ‘buying a top’ after a new near-term high had just printed.

Given the veracity of this recent move higher, catching ‘higher-low’ support may be a little more difficult than looking for the ‘lower-high’ in EUR/USD. On the chart below, I’ve identified four potential areas of support based on prior price action that traders can look to in the effort of catching that next ‘higher-low.’ And price coming down to this level alone is not enough, traders will still want to see some evidence of buying support at this level before looking to get long, as we outlined in the article, The Price Action Trigger.

USD is Inside the Box: EUR/USD, GBP/USD Showing Divergent Trends

Created with Marketscope/Trading Station II; prepared by James Stanley

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

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