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US Dollar Strength Comes Back - But Can it Continue?

US Dollar Strength Comes Back - But Can it Continue?

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Talking Points:

- US Dollar strength has shown since this week’s US open, and the Dollar has retraced as much as 38.2% of the pullback that started a week-and-a-half ago. The big question is whether the Q2 bullish trend is ready for resumption, and a key data point for that theme is on the calendar for Thursday of this week, with the release of June CPI numbers out of the US.

- Showing with perhaps a greater degree of prominence has been a return of equity strength in US indices. The Dow Jones Industrial Average broke-out to fresh three-week highs yesterday, and the S&P 500 appears set for a challenge of the four-month high that was set in March. Also of note from the risk-on side of the ledger is a return of Yen-weakness, as we looked at for one of our Q3 themes of interest.

- DailyFX Forecasts have been updated for Q3 and are available on a variety of currencies such as the US Dollar or the Euro: Click here for full access: DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

US Dollar Bulls Return Ahead of CPI – But Do They Have Staying Power?

The US Dollar has finally found a bid after a pullback in the currency continued into the start of Q3. After failing at the level of 95.53 on DXY in late June, the Dollar started to retrace as we moved towards the close of Q2, and that sell-off lasted into yesterday’s price action. Yesterday morning saw a bit of support set around 93.70, and bulls have been at work ever since, helping to produce a 38.2% retracement of the bearish move that started a couple of weeks ago. This topside move has included a break back-above the key support zone of 94.20-94.30, as well as a bullish break of the bearish trend-line that’s defined the past two weeks’ price action; and this begs the question as to whether the US Dollar’s bullish trend is back in order and ready to resume.

On the hourly chart below, we can see where the bullish resumption move is still rather new, and the bearish short-term trend has not yet been technically reversed as marked by a challenge of the 50% marker. But – there are a few areas of interest for higher-low support, and if we are able to take-out the 50% retracement of this move at 94.62, the door is open for bullish continuation in the Dollar, targeting the 95.00 level followed by the 95.53 double top. For drivers – the CPI report sitting on the economic calendar for Thursday morning will likely be a key determinant as to whether bulls are able to re-gain control here.

US Dollar Hourly Price Chart (DXY): 38.2% Retracement of Down-Trend Finds Sellers

US Dollar Hourly Price Chart usd

Chart prepared by James Stanley

EUR/USD Pulls Back into Support Zone

Going hand-in-hand with that pullback in the US Dollar was a return of strength in EUR/USD after what had become a painful second quarter of the year. EUR/USD started to rally off of support in the final days of Q2, and prices had continued-higher on a rather brisk trajectory. But since yesterday morning, EUR/USD has been pulling back and prices are now testing the key zone of support that runs from 1.1685-1.1736. The pace of recent gains has been broken, but we remain above prior areas of swing resistance, and the door remains open for bullish setups in the pair. But – if we do break below some of the prior swing lows, specifically looking at 1.1630 and 1.1590, that bullish potential becomes nullified and the prospect of bearish continuation is back on the cards.

EUR/USD Four-Hour Price Chart: Dip into Support Zone

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

GBP/USD Shakes on Political Jostling

On an economic front, there’s a fairly strong case for a rate hike out of the BoE in the coming months and, in-turn, a strong case for bullish strategies in the British Pound. But – there are other concerns at the moment, and these are of a very fluid nature as the UK moves towards the showdown with the European Union for UK’s divorce from the bloc in October.

After initially rallying after trading opened for this week, the Pound pulled back on news of UK Foreign Secretary Boris Johnson’s resignation. Prices soon found support around 1.3200 on GBP/USD, and have moved back to find resistance on the underside of a prior trend-line. Positioning here will likely remain suspect in the near-term as the bullish case produced by the potential for a more-hawkish BoE and near-term rate hikes for the UK is at least partially offset by the prospect of continued political jitters.

GBP/USD Two-Hour Price Chart: Cable Gets Messy as Political Risk Jostles Price Action

gbpusd gbp/usd two hour price chart

Chart prepared by James Stanley

USD/JPY Tests 2018 Five-Month Highs as Risk-On Rally Continues

This was one of the themes that we’d looked at coming into Q3, as the Bank of Japan remains one of the most loose and passive Central Banks in the world. And with inflation continuing in a non-threatening manner, with the ECB announcing stimulus exit and the BoE embarking on rate hikes, the door was open for the Yen to be the favored funding currency across FX markets. This could lead to weakness in the months ahead as traders line-up carry across further diverging FX rate regimes.

USD/JPY is currently testing the six-month high in the pair, and this comes-in around the 76.4% Fibonacci retracement of the 2018 bearish move in USD/JPY. A topside break of this level opens the door for a challenge of the 112-handle, followed by 112.50 and then the 2018 swing-high at 113.39.

USD/JPY Daily Price Chart: Testing Five Month Highs, Fibonacci Resistance

usdjpy usd/jpy daily price chart

Chart prepared by James Stanley

USD/CAD Rallies Ahead of BoC Rate Decision

The rate decision of interest this week is the Bank of Canada, set to announce their decision tomorrow morning at 10 AM ET. Markets are expecting a rate hike out of the BoC, but the bank has some issues to contend with – primarily fiscal in nature as the prospect of tariffs and trade wars adds a considerable amount of volatility to their forward-looking forecasts. Nonetheless, the bank has been laying the groundwork for this hike for some time, and odds as we approach that rate decision have been as high as 81%.

The bigger question around tomorrow’s meeting is just how hawkish the BoC might be after the next rate hike. CAD put in a considerable spate of strength over a two-week span from late June into yesterday morning. Prices found support at a confluent area that we’ve been following around 1.3065, and after a couple of hours of grind at that level, bulls have pushed-higher by approximately 70 pips.

USD/CAD Four-Hour Price Chart: Pullback to Fibonacci, Prior Resistance for Fresh Support

usdcad usd/cad four hour price chart

Chart prepared by James Stanley

US Stocks Breakout – S&P 500 Tests Four-Month Highs

One area of markets that have been fairly clear with direction so far this week and, in larger-part, since last week’s Non-Farm Payrolls report has been US stocks.

The S&P 500 continued an impressive rally yesterday, including trading through the June swing-highs. Prices have pulled-up shy of the four-month high that was set in March, and this comes in at the 78.6% retracement of the February sell-off. If we get a break above 2,800, we have fresh highs and the door is open for bullish continuation in the S&P 500.

SPX500 Daily Price Chart: Bullish Breakout Tests Fibonacci Resistance at Four-Month Highs

SPX 500 Daily Price Chart SPX ES SPY

Chart prepared by James Stanley

Dow Resolves Digestion in a Big Way

We looked at the Dow Jones Industrial Average building into a wedge formation last week ahead of Non-Farm Payrolls, and after the report, prices broke out in a big way and have pretty much continued to run ever since. Given the deeper fall that the index saw in June, we have yet to challenge the prior month’s swing highs but, nonetheless, the door remains open for bullish continuation here. Traders will likely want to address this bullish trend by looking for a pullback, however, as we’re fairly far away from any nearby points of resistance that might be used for breakout-style entries. There are prior resistance swings at 24,730 and 24,624 that could be utilized for such a purpose, and we look at those on the four-hour price chart below:

Dow Jones Four-Hour Price Chart: Higher-Low Support Potential After NFP-Fueled Breakout

Dow Jones Industrial Average Four Hour Price Chart DJIA DIA YM

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

Contact and follow James on Twitter: @JStanleyFX

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