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U.S. Dollar Breakout to Face Pivotal Test Next Week

U.S. Dollar Breakout to Face Pivotal Test Next Week

Talking Points:

- The U.S. Dollar breakout has put in an impressive top-side move over the past couple of days, with this morning seeing a break of the March swing-high.

- The month of October has seen an aggressive top-side move in the Greenback as Fedspeak has been considerably hawkish. But with a plethora of U.S. data points for next week, this recent bullish move will be in the spotlight as markets attempt to forecast the likelihood of near-term U.S. rate hikes.

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Earlier in the week we asked if this USD breakout had staying power, and the conclusion was that the Dollar was likely going to remain bid until the Fed began to back off of the idea of near-term interest rate hikes or, at the very least, tempered that talk of near-term hikes with the possibility of slower moves-higher in the future.

This is symptomatic of an environment in which so few economies are actually looking at tighter policy options. With the United States being one of the lone major economies looking at interest rate hikes at some point in the near-future, this exposes the Dollar to additional strength which could, eventually, begin to hit exports as American products become more expensive in foreign markets. Yesterday’s ECB meeting saw a quick rush of strength in the Euro that lasted for about 15 minutes when markets got freaked out that the ECB might begin tapering their QE purchases. But since yesterday morning’s bearish reversal, the Euro hasn’t been able to catch a bid and continues to drop as the US Dollar runs higher.

But next week brings an extended batch of USD data that could confirm or reject this recent top-side run. While few are expecting any actual moves at the Fed’s November meeting despite the numerous pleas from various FOMC members that November is a ‘live meeting,’ December is looking considerably more likely for that next hike. Markets are pricing in an approximate 63.6% chance of a 25 basis point hike in December (via CME Fedwatch). For this to come to fruition, US data will likely need to remain strong; and should any of next week’s US data points come out exceptionally weak, this could bring on a reversal of the Dollar’s recent bullish breakout.

Next week’s US Economic Calendar is rather full, with relevant data prints being released each day, and after Monday, we have a ‘high impact’ data point for each day of next week, as shown below:

DailyFX Economic Calendar for week of October 24th; US Data with ‘High Importance’ Prints Allocated

Going into next week, the bar is incredibly high for this USD breakout to continue. At this point, price action has been bursting-higher since the beginning of October, first breaking out of the longer-term symmetrical wedge pattern (shown in red), and then breaking above the July swing high. After that swing-high was taken out, the Greenback spent the early portion of this week consolidating support around old resistance, leading to another leg in the breakout over the past couple of days that eventually took out the March swing-high in the currency.

Chart prepared by James Stanley

Given the pace of US data next week, the top-side USD move could become workable. While buying at highs on a Friday is generally an unsavory idea for many traders, the fact that so much US data is coming out next week could open the prospect of a counter-trend USD move in order to buy-in around potential support. And then also given that there is additional data coming out in the remainder of the week, this could add a bit of motivation to the greenback to re-fire in the direction of the trend; and this could be attractive for favorable risk-reward ratios.

The difficulty with plotting support in a fresh breakout is that we have very few near-term iterations of such an instance; so a bit of projection is required here. On the chart below, we’re looking at four possible support zones that traders can look to in the effort of trading a top-side USD continuation move. If the green trend-line shown below becomes broken, traders would likely want to question the bullish move; so this can be helpful for stop placement, along with the zone of support just below the trend-line projection that we had looked at previously (the July swing high, shown with a blue box on the below chart).

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.