US Dollar Price Action Setups: EUR/USD, GBP/USD, USD/CAD, USD/JPY
US Dollar Talking Points:
- USD strength remains as one of the more prominent themes in FX, with DXY pushing up to another fresh 19-year high yesterday.
- EUR/USD has provided significant fuel for the move and continues to test support. GBP/USD, on the other hand, has pulled back from it’s sell-off on news of Boris Johnson’s resignation. USD/CAD retains breakout potential and USD/JPY is holding very near 24-year highs. Non-farm Payrolls is released tomorrow at 8:30 AM.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
- Quarterly forecasts have just been released from DailyFX and I wrote the technical portion of the US Dollar forecast. To get the full write-up, click on the link below.
The US Dollar continues to impress, setting yet another fresh 19-year-high yesterday as the DXY level mounted above the 107.00 handle. A large part of the move has been driven by the continued sell-off in the Euro and with the fundamental picture as it is, this is a move that could continue.
The big challenge here is in divergence in monetary policy. As the Fed goes for more and more hikes in the effort of stemming inflation, Europe and the ECB seem to be falling in a similar trap as the Fed last year, ignoring surging inflation for fear of choking off whatever growth is in the economy. In the US, this didn’t work which is why the Fed is forced to play catch-up this year. In Europe, however, there seems to be little motivation to change the picture and this has only spelled more and more Euro weakness. And that Euro weakness will likely bring in even more inflation as imported products are more expensive on a relative basis with the European currency being worth less in foreign-currency terms.
And with EUR/USD as 57.6% of the DXY quote, that continued Euro weakness has had an especially outsized effect on DXY, which continues to surge-higher. From the monthly chart below, we can see the Greenback running up to fresh 19-year highs as the Fed remains the most-hawkish game in town.
US Dollar Monthly Price Chart
One of the more challenging aspects of a trend such as we’ve seen in the USD is that when the trend-side move is going, there’s very little pullback or opportunity to jump-in at a low. And when we do get a pullback, such as what showed at the end of June, it can last for a week or two, bringing on the calls for reversal when in actuality we’re merely witnessing a pullback.
I had highlighted such a theme at the end of June and since then the Dollar has been in the midst of a fairly one-sided move. It can be difficult to chase a trend, even a strong one.
But, tomorrow brings Non-farm Payrolls and this may provide motive for pullback. For traders with a longer-term view, that could spell opportunity. From the USD chart below, there’s a spot of possible higher-low support taken from prior resistance, around 105.65. And if that doesn’t hold, the bullish trendline can keep the door open for topside trend continuation themes down to around the 105.00 handle.
US Dollar Four-Hour Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
The Euro bleed has been the big USD driver this week. EUR/USD broke below a key zone of support earlier this week and hasn’t really stopped selling off yet. As I had written on the final day of Q2, ‘this carries breakdown potential into Q3 and the fundamental side is a major driver that doesn’t look to let up anytime soon.’
That breakdown took hold on Tuesday, so not quite the first trading day of the quarter but very close to it.
We may be in the early stages of a stand at support, however, and this is very short-term but, given the timing of the major trend in USD above, this makes sense.
On a short-term basis support is trying to hold around the 1.0160 area on the chart. That price came in yesterday morning and again this morning. Short-term, if this support holds, there’s a possible double-bottom there, and the neckline for the formation would be around 1.0221, making for approximately 60 pips in distance. If that formation fills, the double top would come with a projected target 60 pips higher, which would project to around 1.0280, an area of prior support-turned-resistance. And above that is the 1.0340 area of prior support.
EUR/USD Two-Hour Price Chart
Longer-term, the big challenge with EUR/USD is just how built-in this bearish move already is, which is one of the reasons why I’m looking for a short-term pullback. But, from the weekly chart below, we can see the attractiveness of a pullback scenario to that zone around 1.0340. And, realistically, given how aggressively the bearish trend has priced in, prices could pop back to the 1.0500 psychological level while still retaining some bearish lean.
EUR/USD Weekly Chart
Chart prepared by James Stanley; EURUSD on Tradingview
While I’m looking for EUR/USD to pullback to a key zone of longer-term support that may show as resistance potential, we have a similar theme brewing in GBP/USD.
Cable pushed down for a fresh two-year-low yesterday, driven by political jitters that have somewhat reversed this morning as Boris Johnson has announced his resignation.
GBP/USD quickly pulled back to the prior support zone of 1.2000-1.2021 and that zone gave an approximate 80 pip reaction. Buyers stepped-in at a higher-low, however, and it looks as though the pair has more recovery potential as an ascending triangle is building on short-terms. This can keep the door open for a move up to the 1.2090 area, after which the rectangle from last week comes into the picture.
GBP/USD Hourly Price Chart
USD/CAD Triple Top
USD/CAD has now had three resistance inflections at the 1.3077 spot over the past couple of months. When it came into play on Tuesday, buyers were able to budge just a little further than the previous hit a few weeks earlier, giving the appearance that there’s started to show some bend at that resistance that, as yet, hasn’t quite broken.
Prices are pulling back after that failed breakout and we’re currently seeing some support around the 14.4% Fibonacci retracement of the recent move. But, if sellers continue pushing today, we may end up with an evening star formation which would highlight greater bearish potential.
On a longer-term basis, that double top remains as a possible theme until resistance is broken-through at 1.3077. The neckline for the formation is all the way down around 1.2518 so that’ll take some time to come into the picture but, nonetheless, it remains as relevant until the formation is negated.
Tomorrow brings CAD jobs at 8:30 AM ET alongside the Non-farm Payrolls report, so matters can get messy here tomorrow morning.
USD/CAD Daily Price Chart
USD/JPY has now spent the past couple of weeks in a fairly consistent range between 135.00 and 137.00. And given the prior trend, the fact that it hasn’t pulled back more is de facto bullish in my eyes. The fact that lower-highs have been printing buffers that bullishness a bit, but as long as price remains above the 134.48-135.00 support zone, I’m going to retain a bullish bias here.
For Yen-strength themes, at least at this point, I think there are greener pastures elsewhere than trying to go short the USD.
USD/JPY Four-Hour Chart
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.