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Talking Points:

- The end of summer trading is near, as next weekend brings the Labor Day holiday out of the United States, commonly used to mark the end of summer in the US. But – FX has not been showing summer-like moves of recent, as we’ve seen a decent dose of volatility, particularly in the month of August as a number of longer-term formations have become of interest.

- The British Pound put in a very bullish Wednesday on the basis of some news on the Brexit front, and the US Dollar is holding at August lows after a vigorous reversal in the second half of the month reversed the entirety of the gains that came-in during the first-half. A large driver to this move in the US Dollar has been EUR/USD, where the question remains whether the four-month bearish trend can remain intact or whether we’re looking at a larger-scale bullish reversal as we move into the month of September. We look at Monthly charts around USD and EUR/USD below.

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the 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.

GBP/USD Breaks Out as USD Holds Support at August Lows

As we wind down the summer months, volatility continues to show across global markets. US equities gapped-up to fresh highs yesterday after a pullback began to show around mid-day; and the US Dollar is continuing to hold support around the August lows as we wind down the month. The big item from yesterday was a bit of unexpected clarity on the Brexit-front, as the EU’s Chief Negotiator Michael Barnier announced that the EU would be open to a partnership with the UK, indicating that the ‘Hard Brexit’ or ‘No-Deal Brexit’ option was not on the table as a reasonable outcome.

This brought almost an instantaneous release of pressure out of GBP/USD as the pair quickly broke out from resistance and soon traded above the vaulted 1.3000 psychological level. In our article published yesterday entitled, GBP/USD: Cable Challenges 1.3000 as Fibonacci Support Bounce Extends, we were looking for short-term resistance to top out around 1.3043, at which point the potential for working with pullbacks comes into the equation.

GBP/USD Hourly Price Chart: British Pound Breaks Out, GBP/USD Re-Engages Above 1.3000

gbpusd gbp/usd hourly price chart

Chart prepared by James Stanley

The US Dollar Holding at August Lows as Month-End Nears

It’s been a climactic month for the Greenback, as we came into August with a full head of steam, largely on the basis of sell-offs continuing in both EUR/USD and GBP/USD. That ran for the first half of the month but on August 15th, the Dollar hit resistance as both EUR/USD and GBP/USD started to dig-out support; and the second-half of the month has been marked by a complete reversal of that prior August theme.

The net being a fairly nasty monthly bar in the US Dollar as we now have a tombstone Doji, and this comes after last month’s Doji which indicates softening in the four-month bullish trend. We still have a day-and-a-half of price action before this monthly bar completes, but if we do finish with something resembling our current backdrop, long USD strategies will be more of a challenge.

US Dollar Monthly Price Chart

us dollar usd monthly price chart

Chart prepared by James Stanley

From the Weekly chart of the US Dollar, we looked into a formation that finished with last Friday’s price action after USD ran into a key area of resistance. The level of 96.47 is the 23.6% Fibonacci retracement of the 2011-2017 major move, and the 50% marker of the same study helped to set support in February of this year.

Prices ran into that resistance two weeks ago, and even caught a day-and-a-half of run above this level; but strength could not hold and prices soon fell back. Last week, this amounted to an evening star formation on the weekly chart, which will often be looked at for bearish reversals. We didn’t yet want to act on the formation as prices were holding near a big level of support… but as prices have slid below support this week, the door for bearish USD strategies appears to be re-opening after a four-month hiatus.

US Dollar Weekly Price Chart: Prior Week Evening Star Formation Sees Bearish Follow-Thru

us dollar usd weekly price chart

Chart prepared by James Stanley

As we discussed yesterday, with USD slipping below support, short-term bearish strategies could be investigated, largely under the premise of resistance showing at prior support. That took place as buyers pushed up to 94.93 before sellers came back-in to push prices back down to previously-set August lows around the 94.50 level on DXY.

This leaves us in a rather undesirable spot on the US Dollar chart as we move towards month-end. Bullish strategies could still hold some value under the premise of August support holding into month end; and the big question is whether bulls will be able to show any lasting strength upon a re-test of the 95.00 level.

US Dollar Four-Hour Price Chart: Short-Term Bearish Theme is Stretched, Long-Term Bullish Theme is in Question

us dollar usd four hour price chart

Chart prepared by James Stanley

EUR/USD Holding Resistance

Going along with those reversal scenarios in the US Dollar, we have to look at EUR/USD as this appears to be where a major portion of the USD-push has been emanating from of recent; and it was a chaotic month for the single currency.

EUR/USD came into August dropping with speed, as markets grew cautious around the prospect of contagion in the European banking sector as taken from exposure to the ongoing situation in Turkey. This led to a fast move that finally broke below 1.1500; and less than a week later we had plunged down to find support at the 1.1300 handle. But something funny happened there – the selling just stopped and buyers began to take over. What started off as a retracement soon moved into reversal, and the second half of August saw EUR/USD rally just as quickly as it had fallen.

EUR/USD Four-Hour Price Chart: V-Shaped Reversal into Key Resistance

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

At this stage, the potential for bearish strategies remains as prices in EUR/USD are holding at this key area of resistance. But – as we shared in this week’s FX Setups, a break above the 1.1750 level should be construed in a bullish manner with the prospect for continuation. Should we get this shaping up in the last day-and-a-half of August, then we’ll have a hammer formation on the monthly chart, which is very interesting for bullish reversal scenarios, as this formation will often pop up after capitulation at fresh lows, signaling the possible end of a down-trend scenario as a strong reversal took place intra-bar.

EUR/USD Monthly Price Chart: Vigorous Reversal Exposes Under-Side Wick, Hammer Potential

eurusd eur/usd monthly price chart

Chart prepared by James Stanley

Bearish USD Potential in GBP/USD

As we discussed yesterday, what took place around the British Pound could have the potential to drive price action for a while. After Brexit had become a largely negative factor for the currency, with heavy fears around ‘Hard Brexit’ or ‘No-Deal Brexit’ scenarios, this comment from the EU’s Chief Negotiator made it appear as though those options aren’t on the table.

Coming into this week, there wasn’t much positivity of note around GBP/USD. As a matter of fact, earlier in the month we looked at bullish setups largely on the basis of just how negative matters had become, looking for GBP/USD to bounce from a big support level as oversold levels were showing on RSI from both Daily and Monthly time frames.

After reversing from the 78.6% Fibonacci retracement in April, the August reversal has started from the 23.6% marker of that same major move.

GBP/USD Weekly Price Chart: 23.6% Fibonacci Bounce after 78.6% Fibonacci Resistance

gbpusd gbp/usd weekly price chart

Chart prepared by James Stanley

With the door now opening for additional topside in GBP/USD, traders looking to play a larger breakdown in the US Dollar could find items of interest here. The short-term bearish trend that we’ve been following appears to have given way, and as prices work on higher-highs and higher-lows, traders can look at bullish continuation strategies in the pair.

At this point, we’re getting a bit of support from the big psychological level after prices topped-out at 1.3043. The question of longer-term continuation does remain, particularly from a fundamental standpoint as we’re likely still looking at a dovish Bank of England. But – should Brexit risk actually continue to soften, this could remove one of the primary hindrances to near-term rate hikes for the BoE, and there could be continuation power yet, particularly as we move into 2019.

GBP/USD Four-Hour Price Chart

gbpusd gbp/usd four-hour price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 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 DailyFX.com

Contact and follow James on Twitter: @JStanleyFX