US Dollar Price Action Setups: EUR/USD, GBP/USD, AUD/USD, USD/JPY
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US Dollar Talking Points:
- The US Dollar has continued to pullback after last week’s FOMC rate decision.
- The Fed didn’t say anything particularly dovish but given the response in both Forex and equity markets, it seems that there’s building hope for a nearby-pivot for the US Central Bank.
- 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 has continued to pullback after last week’s rate hike from the Fed. And unlike the June rate decision, where the USD set a high right at the statement release, the Greenback merely continued it’s pullback state around the July meeting. Given the precipitous fall in Treasury Yields, it seems that many are expecting that the Fed may be nearing a pivot. Or – on the other hand, it could be investors preparing for difficulty ahead, loading up on longer-dated treasuries in anticipation of an eventual pivot should recessionary conditions continue to appear. I had discussed this in the equity forecast for the week ahead, but it remains pertinent to FX and the US Dollar, as well.
Whatever it is, falling yields are carrying a big impact across markets and, at this point, that’s been a positive for equities and a negative for the US Dollar. This would be par for the course given the past 13 years, where the Fed’s primary tool for fighting slow growth and minimal inflation was more accommodation, either in the form of rate cuts or QE.
But, that’s not the environment that we’re in now. Inflation remains at 40-year highs and while there have been some initial indications that there could, possibly be some cooling – nothing is certain yet. And given recent comments from Fed members, such as Neel Kashkari yesterday, it seems the Fed has plans for continued tightening until inflation is under-control.
From longer-term charts, the US Dollar remains very near those recent highs although an extended upper wick from last month’s recently-completed candle highlights a strong response from sellers at the 76.4% Fibonacci retracement of the 2001-2008 major move.
US Dollar Monthly Price Chart
From the weekly chart of USD below, we can see where prices have retraced a little over 50% of the recent topside trend, tracked from the late-May low up to the July high. There’s also been a hold of support above the 105 psychological level, which was also a prior point of resistance. This makes for an interesting spot for a potential pivot in the USD.
US Dollar Weekly Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
Going down to the daily chart of USD, we can get more granularity in the pullback move and we can see where a falling wedge formation has built, also taking on the form of a bull flag. This can keep the door open for short-term bullish reversal scenarios which, in this case, would align with the direction of the longer-term trend.
In terms of context, the 38.2% retracement from that recent bullish trend would be a point of reference, as it’s near confluent with the resistance portion of the wedge.
US Dollar Daily Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
In terms of the US Dollar, there’s some additional context, and that comes from EUR/USD. I’ve been talking about this since the parity level came into play a few weeks ago. This is a major psychological level, and given how stretched the Euro was when that price came into play, a continued break below that major level likely would’ve needed a considerable increase in motivation. Widening credit spreads in Europe could be that driver, or possibly even greater recessionary fears taking-over in Europe.
Given how aggressively EUR/USD has sold off over the past year-and-change, falling by more than 2,000 pips from the May 2021 high with a hastening in the move of late, the pair may simply need a bit of a pullback before sellers can finally leave that parity level behind. And if we look at EUR/USD from the daily chart, we can even see a range that might be a first step towards such a retracement.
Notice how EUR/USD has seen resistance from around 1.0220-1.0233 for nine of the past nine trading days while building into a rectangle pattern. This is a very consistent range in what was previously a very volatile pair, and it’s so far held through the ECB’s lift-off 50 basis point hike as well as the Fed’s most recent 75 basis point hike. That range has held until yesterday, that is, when prices put in their highest close on the daily since early-July. That move even tested outside of resistance yesterday, teasing a topside breakout before sellers made a re-appearance, pushing price back into the range.
This, in my opinion, highlights an oversold market in which sellers are trepidatious of opening too close to the parity handle. This is also something that could lead to a pullback or retracement, in essence washing out some longer-term shorts as breaches of near-term highs trigger trailing stops, after which the dominant trend can be ready for resumption.
There’s even a spot of interest for such a scenario and this would be looking for a re-test of the 1.0340-1.0365 area, the former of which was the low in EUR/USD for 19 years before being taken-out last month.
The big question is whether EUR/USD bears will pullback long enough to allow for that short-term breakout to propel price into a possible point of lower-high resistance.
EUR/USD Daily Price Chart
GBP/USD Cable Correction
I started looking into reversal potential in GBP/USD a few weeks ago, just after a falling wedge had formed on the way down to fresh two-year-lows. Falling wedge formations are often tracked with the aim of bullish reversals, hypothesizing that the same lack of motivation at or around lows can, eventually, transition into a show of strength.
In GBP/USD, this simply looked like one of the more attractive areas for non-USD risk at the time given that formation. And in the few weeks since, prices have continued to rise and GBP/USD now sits at a fresh monthly high after breaking-above an aggressively sloped bearish candle.
There’s a Bank of England rate decision on Thursday and I’m not really sure how to factor that in other than an absolute value of potential volatility. But, given the current price action backdrop we may be at the fore of a bullish trend if buyers can hold the line. Short-term support has shown around a prior point of resistance, at 1.2187. A bit deeper is a secondary spot of support, around 1.2068.
And if sellers take-over to push prices back-below the 1.2000-1.2021 zone, reversal scenarios would not longer be attractive.
GBP/USD Eight-Hour Price Chart
On that topic of Central Banks, we heard from the RBA last night and they weren’t as hawkish as they’d sounded previously. So, despite the 50 bp hike, AUD/USD has seen weakness and this is largely based on the tone that the bank had through last night’s rate hike. To read more, check out this article from Daniel McCarthy on the topic.
Regarding price action – like GBP/USD, AUD/USD had put in tones of recovery of late, breaking out of a falling wedge formation which was a bit longer-term than the formation looked at above in GBP/USD. In AUD/USD, that wedge compression had been going since late-March as the pair dove from above .7650 all the way down to .6682, a move of almost 1,000 pips.
The first portion of the bounce, lasting about a week, showed up very quickly. But since July 20th, there’d been significant grind on the chart as the pair was edging higher, eventually running into a resistance zone spanning from the psychological level of .7000 up to a Fibonacci level at .7053. This was the zone that was in-play last night ahead of the RBA.
With the Reserve Bank of Australia sounding less-hawkish, the pair has snapped back – and is now testing a key spot of support at .6911. This is the same spot that was holding the lows last week, and plots near a key Fibonacci retracement that’s also confluent with the resistance trendline making up the falling wedge formation.
AUD/USD Eight-Hour Chart
Given the continued fall in US Treasury Yields, USD/JPY has been pulling back with aggression. As looked at numerous times previously, when US rates are rising, the topside of USD/JPY can be attractive to carry traders. With the Bank of Japan still sitting on negative rates, higher US rates means greater swap or rollover amounts, and that can lead to greater demand in USD/JPY.
That greater demand in USD/JPY helps to push prices-higher, so carry trades can bring benefit from both the higher rates as well as the higher prices as other traders follow that increased demand. It’s a beautiful symbiotic scenario when it’s working and since March of this year, it had. Until recently, that is.
As US yields have continued to fall, even with the Fed hiking further, USD/JPY has put in a deeper pullback. And with the reversal picking up steam, other traders that had followed the carry trade into USD/JPY are seeing the reversal.
This is where the phrase ‘up the stairs, but down the elevator’ comes from. Because as prices begin to slide in anticipation of what’s around the next corner, other traders reacting could hasten the move-which could cause panic elsewhere, leading to more hastening.
This is still early – but given how built up that bullish trend had become, there could be a lot more room for USD/JPY to slide should this theme continue to take-hold. The next major level of support on my chart is the 130 psychological level. If sellers are able to slice through that in short-order, the bearish reversal theme could start to take-on another level of interest. For now, the prior double top at 131.25 could prove as support and if the daily bar closes above that level, there could be short-term bullish scenarios to work with, essentially looking for prices to rally into a possible area of lower-high resistance.
USD/JPY Daily 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.