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US Dollar Price Action Setups: EUR/USD, GBP/USD, AUD/USD, USD/JPY

US Dollar Price Action Setups: EUR/USD, GBP/USD, AUD/USD, USD/JPY

James Stanley, Senior Strategist

US Dollar Talking Points:

  • The US Dollar is bouncing from confluent support ahead of tomorrow’s FOMC rate decision.
  • The Fed is expected to hike by 75 bps but the bigger question is what else is said at the press conference regarding future hikes in September and thereafter.
  • 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.
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Tomorrow brings the Fed, but you probably already know that. And you also probably already know that a 75 basis point hike is widely-expected here, to the degree that if that didn’t happen, there may be turmoil elsewhere. If the Fed goes too light, questions will abound about their commitment to fighting inflation or, perhaps more troublingly, what is the Fed seeing that’s constraining them from doing so? On the other hand, if the Fed goes heavier with a 100 bp hike, well we may see the turmoil that had showed a few weeks ago as markets had started to expect as such. This was offset on Thursday and Friday (July 19th/20th) as FOMC-speakers talked down that prospect.

But, inflation remains aggressively-high and, as yet, the Fed’s rate hikes haven’t shown much for impact in addressing the matter. Rate hikes usually take time to transmit, however, and the Fed only started liftoff a little over four months ago, so we’re still in the early stages. And this is generally why Central Banks might want to be hawkish as inflation shoots over target, because once it takes on a life of its own it can be difficult to get a handle on, just as was seen in the 1970’s.

Treasury rates have been falling of late and many are pointing to the fact that inflation may have peaked, and this is the bond market reflecting that message. But, one look at the yield curve adds some context because while yes, rates are falling, it’s also happening unevenly and at this point, the 2/10 yield curve is at its most inverted in over 20 years.

This isn’t a positive signal for future growth: Because as rates are rising on the short-end of the curve, pushed along by the Fed’s hikes, investors are going out on the curve to take on duration in Treasuries. The simple act of buying Treasuries at current rates exposes the potential for a principal gain if/when rates fall further. So, in essence, as the Fed hikes rates, market participants appear to be betting more and more on some economic headwinds ahead, as indicated by this strength in longer-dated treasuries.

As an illustration of this theme, the 2/10 yield spread, or the difference between yields on two and ten year treasuries has inverted and is at its lowest since November of 2000.

US Yield Curve Spread between Two and Ten Year Treasuries

2-10 yield curve spread

Chart prepared by James Stanley; data from Tradingview

This means that two year treasuries are currently yielding more than ten year treasuries, to the current tune of about 26 basis points.

So, ask yourself – why would an investor take on 10 years of risk at a lower rate, .26% as of this morning, as opposed to a higher rate for less duration risk? This would be like walking into the bank and asking for a 10-year mortgage, and then being given a higher rate than if you’d taken out a 30-year mortgage. What bank would offer that? Probably none, because the longer term brings on more risk that would need to be compensated for with a higher rate of interest.

When that doesn’t happen in markets – such as what’s showing right now – that’s extreme distortion and again, likely being driven by investors and funds buying longer-dated treasuries in anticipation of the eventual move towards lower rates, which can be driven by worsening economic conditions.

US Dollar

The US Dollar is in a peculiar spot at the moment. Not only has the currency been bid by higher rate themes, which would be a traditional FX driver emanating from rate divergence. But, there’s also the possibility of haven flows as the clouds have grown darker over Europe.

So, this may be a rare situation where the haven is also the higher-yielding currency and this would add some perspective to the US Dollar’s bullish run over the past year and, more to the point, the past six months as the Russia-Ukraine scenario has continued.

On a short-term basis, the US Dollar is currently trying to hold higher-low support. That showed at a confluent spot on the chart as both a bullish trendline and a 38.2% Fibonacci retracement plotted around 106.24. This can keep focus on bullish trend continuation themes in the USD.

US Dollar Daily Price Chart

USD daily chart

Chart prepared by James Stanley; USD, DXY on Tradingview

EUR/USD In the Box

EUR/USD is currently in a rectangle formation and this is something that will often show around consolidation. The rectangle or box is generally approached with the aim of breakouts and this morning saw the underside of that box get tested at 1.0120, with wicks highlighting reaction at that level. For bullish USD-themes, bearish EUR/USD stances are likely going to be a considerable part of that approach.

Bigger picture, the question is around what might develop in Europe in the second-half of this year. With Natural Gas prices quickly jumping back to a fresh high and with the ongoing Russia-Ukraine scenario not improving, there’s risk of a troubling winter in Europe with energy rations along with skyrocketing energy prices.

Europe is already struggling with inflation and the ECB has just started to hike rates in effort of addressing the matter. But energy prices are somewhat of an uncontrollable variable here and higher energy prices could persist even through higher rates.

But, if the ECB doesn’t hike more, then there’s more risk to the Euro losing value which can increase that inflationary pressure. So, the ECB really does appear to be boxed in here: They have to hike to try to address inflation and to keep the Euro from falling through the floor but, on the other hand, they have to hike carefully for fear of choking off whatever growth is left. And then, when all is said and done, there may be an energy crisis in Europe later this summer.

Collectively, this is why the single currency has had difficult holding support of late, with its first incursion of parity on EUR/USD in almost 20 years.

For now, the rectangle is set and a bearish break exposes the parity level for another test. On the other side, in the event of a bullish breakout, resistance potential exists at the prior low of 1.0340.

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EUR/USD Four-Hour Price Chart

eurusd four hour chart

Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD

Cable’s near-term price action appears messy to me. When I looked at the pair two weeks ago there was a falling wedge formation that was setting up. Such formations are often approached with the aim of bullish reversals, and that started to show up last week.

Prices have since moved up to the 1.2090 level of resistance and there’s been a continued build of both higher-lows and higher-highs. At the moment, GBP/USD appears to be in the process of trying to defend the 1.2000 psychological level.

The complication with bullish themes at the moment would be a lack of run from bulls near highs or at resistance. This is allowing for the initial stages of a rising wedge to form, which is the mirror image of the falling wedge from two weeks ago and is usually plotted with the aim of bearish reversals.

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GBP/USD Four-Hour Price Chart

gbpusd four hour chart

Chart prepared by James Stanley; GBPUSD on Tradingview

AUD/USD

AUD/USD has also broken-out of a falling wedge formation of recent, although the setup in AUD/USD was a bit longer-term than what was looked at above in GBP/USD.

The falling wedge in AUD/USD built from mid-June into mid-July, with last Monday showing the breakout from the formation. And, initially, the pair had some topside run that propelled price back-up towards the .7000 big figure.

Price action over the past few days, however, has been especially ‘whippy’ with little direction. On the daily chart below, notice the elongated wicks on either side of the past few days’ worth of candles. This is indicative of a market seeking direction, and it opens the door for either a support test at .6854 or a resistance test at the .7000 big figure.

Given variance from EUR/USD or even GBP/USD above, AUD/USD may have preference for bearish-USD biases or for pullback themes around USD going into FOMC tomorrow.

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AUD/USD Daily Chart

audusd daily chart

Chart prepared by James Stanley; AUDUSD on Tradingview

USD/JPY

USD/JPY is grasping for support. Last week’s BoJ meeting produced no significant changes at the Japanese Central Bank. Nonetheless, Yen-weakness has been subdued ever since, begging the question as to whether markets are starting to price something else in or whether there’s a building expectation for an eventual change.

In USD/JPY, price remains at support as guided by a bullish trendline, but buyers haven’t been able to push back-above short-term resistance yet, plotted at around 136.70-137.00. There’s deeper support in the 134.48-135.00 zone.

For traders looking at strategies of Yen-strength, EUR/JPY or perhaps even GBP/JPY may present some interest.

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USD/JPY Four-Hour Price Chart

usdjpy four hour chart

Chart prepared by James Stanley; USDJPY on Tradingview

--- 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.

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