Dollar Tests a Key Resistance Level as EUR/USD Sits on Support

2017-02-21 14:19:00

Talking Points:

- The U.S. Dollar has ran-up to test a key resistance level at 101.53; and a sustained-break above this level could signal the return of the bullish-Dollar theme.

- USD-strength is showing vividly in EUR/USD as the pair tests a key support level; and USD/JPY is still congesting on a longer-term basis with continued support at a key region.

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USD Comeback: The U.S. Dollar has started this week off on a rather bullish foot, and this comes after the currency posed a hard reversal on Wednesday of last week. As we opened last week with Fed Chair Janet Yellen’s twice-annual Humphrey-Hawkins testimony on the calendar, the potential for a return of the bullish U.S. Dollar up-trend was very much alive. After a near-historic run after the Presidential Election in November, the Greenback spent most of January heading-lower as traders realized gains and tightened-up positions. But as we came-in to February, support began to show and bulls began to return; and as we opened last week with Fed Chair Janet Yellen’s two-day Humphrey-Hawkins testimony on the calendar, the opportunity for that trend to extend was very much there.

Day one of that testimony on Tuesday further contributed to the Dollar’s gains; but it was the strong inflation print on Wednesday morning that really excited matters, as the Dollar ran-up to a key resistance level at 101.53. This is the 50% retracement of the January retracement; and should price action be able to show a sustained break-above this level, the prospect of the bullish up-trend returning would be quite a bit more attractive.

But that inflation-fueled run-higher on Wednesday morning was short-lived: Just as Chair Yellen began speaking on day two of her Humphrey-Hawkins testimony, the Dollar began to sell-off, and continued to do so into Thursday. Support finally showed at mid-day on Thursday, and since then bulls have returned to drive prices back up to the level where we reversed on Wednesday: This is the 50% retracement of the bearish January move, and should price action be able to pose a sustained break-above this level, continuation prospects could seem considerably more-likely.

Chart prepared by James Stanley

USD/JPY remains subdued

While the U.S. Dollar is testing resistance from last week with legitimate top-side continuation prospects, price action in USD/JPY is quite a bit more subdued at the moment. Last week’s high on Wednesday in USD/JPY was unable to break-above the prior swing-high at the end of January (DXY was well-above that point using similar observations). And on this most recent run, the Dollar has already ran-back to resistance while USD/JPY is still well-below those prior highs.

So, while the longer-term trend would still remain as bullish given continued support above this widely-watched region, the prospect of timing may be a bit more elusive as buyers haven’t appeared overly-excited about trend continuation, at least just yet. This could make the possibility of another support-check later in the week extremely exciting for longer-term bullish accumulation.

Chart prepared by James Stanley

EUR/USD at Support

One area where that recent up-tick in USD-strength has shown up rather prominently has been against the Euro. The January pull-back in the strong-Dollar theme ran EUR/USD higher by almost 500 pips. But as strength returned in February, EUR/USD began to fall. The reversal on Wednesday of last week took place at the 61.8% Fibonacci retracement of that January move at 1.0527; and with Dollar strength showing back-up rather prominently over the last couple of trading days, EUR/USD has returned right back to this support level. A bit lower at 1.0500 we have a major psychological level and from there down to the 1.0340 13-year low we have a plethora of prior support swings.

Should support hold above 1.0500 in the early portion of this week, this setup could potential become an attractive reversal candidate given EUR/USD’s struggles to elicit sellers below 1.0500.