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Talking Points:

- EUR/USD is under pressure as Dollar strength continues off of yesterday’s lows. This is raising the question of whether the U.S. Dollar can extend any element of a rally after a brutal 2017. PCE is on deck for tomorrow, and Non-Farm Payrolls for Friday – so the drivers are there.

- A pivotal ECB meeting on the calendar for next Thursday, combined with prices moving above the psychological level of 1.2000 is likely creating some unwind of the prior bullish trend. For scenarios of extended USD-weakness, GBP/USD may be a more attractive option, as we discuss below.

- IG Client Sentiment remains elevated in EUR/USD, with a current read of -2.45 while GBP/USD is currently showing -1.1727.

- Want to see how Euro, GBP and USD have held up to the DailyFX Q3 Forecasts? Click here for full access.

In yesterday’s article, we looked at the U.S. Dollar after a fresh 2.5 year low had printed in ‘DXY’. We had also looked at the setup in USD/JPY as a long-term support zone continued to face tests in the region that runs from 108.13-108.83; but by the time our webinar was ready to go at 1PM Eastern Time, a reversal had already started to show in the Greenback. This opened the door for a litany of reversal setups in major pairs, including EUR/USD as an elongated wick extended beyond the 1.2000 psychological level. Since then, we've seen that theme continue to run as the Dollar is continuing to rally off of yesterday’s low.

This is far from confirmed yet as a theme yet, as we’re talking about almost eight full months of weakness running into one day of strength; but as we walk into a critical September for a number of Central Banks, and with a pivotal ECB meeting just one week away - the fundamental backdrop could certainly support the scenario of a pullback in the well-heeled trends of EUR/USD and, bigger-picture, USD-weakness as we move closer to encountering some of those drivers.

U.S. Dollar via ‘DXY’ Four-Hour: V-Shaped Reversal Off of Yesterday’s 2.5 Year Low Print

Has EUR/USD Topped Until ECB?

Chart prepared by James Stanley

This prospect of a low in USD is something we’ve been following for the past few weeks as evidence has begun to show that a bottom may be near in USD. After a brutal July, a series of higher-lows began to show in DXY for a few weeks in August, and as we walked into Jackson Hole in the latter portion of last week, the Dollar remained above the August low. But another run of weakness at Jackson Hole on the heels of Janet Yellen’s comments brought USD into this week in a weakened position, and then when North Korea launched a missile over Hokkaido, Japan, giving another burst of life to risk aversion, the Dollar sank below the 2016 low to set a new 2.5 year-low. But something not usual (for the past few months) has started to happen: Sellers have dried up, and bulls have begun to take control of the short-term dynamics in the U.S. Dollar.

Prices remained below that level of 91.92 for about six hours, and since then buyers have continually pushed prices higher, giving the appearance of reversal potential. But – just as we said in August when looking at this theme, given how new or early this is, traders will likely want to wait for a bit of bullish confirmation before looking to swap from a bearish to a bullish stance in the U.S. Dollar.

On the chart below, we’re looking at three resistance zones that traders can use to confirm the bullish potential around the U.S. Dollar. A break above 94.15 gives us a fresh monthly high in DXY, and this could make the scenario of an extended run of USD-strength look a lot more attractive.

U.S. Dollar via ‘DXY’ Four-Hour: Resistance/Bullish Confirmation Levels Applied

Has EUR/USD Topped Until ECB?

Chart prepared by James Stanley

This reversal of strength in the U.S. Dollar has pushed EUR/USD lower from the pair’s 2.5 year highs above the 1.2000 handle. Earlier in the month, we discussed the importance of psychological levels like 1.2000, and with a key ECB meeting on the schedule for a week from now where investors are expecting to finally hear what the bank’s next steps with QE will be, it makes sense that we’d see some pullback or tightening of that prior theme of EUR/USD strength.

The daily chart of EUR/USD shows that elongated wick extended beyond 1.2000, with what has been some attractive follow-thru so far on the day. If today’s daily candle closes below 1.1950, we’d have an evening star reversal pattern, which could make the prospect of bearish setups that much more attractive as we walk into next week’s ECB meeting.

EUR/USD Daily: Reversal around 1.2000 with Potential Evening Star if Daily Close Below 1.1950

Has EUR/USD Topped Until ECB?

Chart prepared by James Stanley

From the four-hour chart of EUR/USD, we can see where support has begun to show around a prior area of resistance straddling the 1.1900-handle so, again, this is all very early. The 50% Fibonacci retracement of the most recent bullish extension of the predominant trend comes in at 1.1866, with the 61.8% retracement showing at 1.1817. This can produce a support zone for the pair that traders can utilize to look for a bigger-picture reversal. If EUR/USD is able to actually take-out this zone, then the prior batch of support that runs from 1.1685-1.1736 becomes an attractive target for downside plays ahead of next week’s ECB meeting.

EUR/USD Four-Hour: Support at Old Resistance 1.1900; Potential Support Zone 1.1817-1.1866

Has EUR/USD Topped Until ECB?

Chart prepared by James Stanley

For those that do want to look at longer-term bullish stances in USD, pairs that don’t include the Euro could be a more-attractive way of going about it, especially considering how markets have treated the single currency over the past few months. We’ve been discussing the British Pound as such an option, and on Monday we looked at a key resistance zone that runs from 1.2929-1.2960 that’s held up well so far, and given the fundamental implication behind each currency, this could make for a much more attractive candidate to use to buy USD with a longer-term or bigger-picture focus.

GBP/USD Four-Hour: Response to Resistance Zone

Has EUR/USD Topped Until ECB?

Chart prepared by James Stanley

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

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