US Dollar Technical Forecast: EUR/USD, GBP/USD, USD/CAD, USD/JPY
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US Dollar Forecast: Neutral
- The US Dollar’s bullish trend remains on hold after setting a fresh twenty year high in September.
- EUR/USD continues to test a key price level at 1.0350 and GBP/USD has put in another break-above the 1.2000 psychological level. USD/CAD can remain of interest for USD-bears, price has found resistance at a key spot of prior support, keeping the door open for bears.
- 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.
There’s now a little over a month left in 2022 trade and it’s been a busy year. The US Dollar has embarked on a historic run as the Fed has hurriedly hiked rates in effort of stemming inflation. And while we may be at the early stages of inflation softening, markets have started to build in the expectation for a slower pace of hikes from the Fed.
This is reflected in US Dollar price action. The DXY hit a fresh twenty-year-high in late-September, helped along by a collapse-like move in the British Pound. GBP makes up 11.9% of DXY, so moves in GBP/USD will have a noticeable impact on the Greenback. October price action brought indecision into the mix but so far, November has been a fast reversion as prices have pulled back.
A big component of this move is recovery in the Euro. While GBP makes up 11.9% of the DXY, the Euro makes up 57.6% and it’s difficult for the US Dollar to put in a move without at least some participation from the Euro. I had looked into this in October, highlighting a series of higher-lows in EUR/USD and this was happening as fear was starting to dissipate around the upcoming European winter. With the ongoing war in Ukraine, energy supplies are expected to be disrupted, putting Europe in a vulnerable position. But as fear around that item started to slow, so did the bearish action in EUR/USD which then pushed a strong pullback move in the pair.
This, of course, had large impact in the USD and we can see this on the monthly chart of the USD. But, putting this into scope, and the DXY hasn’t even retraced 38.2% of the prior bullish move that started in 2021. This would retain some longer-term bullish potential in the matter and that argument can be made until the 50% mark of that major move is violated, at which point the originating trend would come into question.
US Dollar Monthly Price Chart
EUR/USD: New Trend Potential
Many bullish trends start as a short-squeeze scenario. And I think that’s how the turn in EUR/USD played out over the past couple of months.
I started looking at this in late-October and as noted above, the technical backdrop was fitting with the lessened fear around European energy for the upcoming winter. But, from the monthly chart, it’s pretty clear that a shift has happened here, as the aggressively-sloped bearish trendline guided the move from February until this month, when buyers finally posed a topside breakout beyond that trendline.
EUR/USD Monthly Chart
Last week saw a strong reaction at a big level of 1.0350. This was the low in 2017 and for five years that held as the 15-year-low until it was violated in July of this year – but that wasn’t before it helped to hold the lows in May and June. And then even after the break, it showed as resistance in August, thereby confirming it as an important level on the chart.
It came back into the equation last week and helped to hold the highs, which kept the door open for a pullback; and the week started with that. But, sellers weren’t able to continue the move and now there’s the possibility of a higher-low.
There could be some fade potential here, however. Last week’s high came up just short of the 1.0500 psychological level. So, if buyers can pose another topside breakout – and then push into 1.0500, there could be extra motive for sellers. But, until sellers breach back below the 1.0200 handle, the bearish theme will remain on hold.
EUR/USD Weekly Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
GBP/USD is currently trading at a fresh three-month-high, as of this writing. While the 1.2000 level helped to hold resistance last week, the corresponding pullback ran down to 1.1760 after which bulls prodded another topside move.
As for next resistance, there’s an area around 1.2150 that remains interesting. But, given how much grind took place around 1.2000 when price was on the way down over the summer, there’s a lot of noise so it can be difficult to pick out just one operable spot.
Potentially more interesting, however, is the build of a rising wedge formation. These are often followed with the aim of bearish reversals, with the first step being a violation of the support trendline. If that begins to show, that can open the door for a bigger bearish move in Cable.
GBP/USD Daily Price Chart
On the bearish side of the US Dollar, USD/CAD remains of interest. I had looked into the pair coming into this week, highlighting a key area of resistance at prior support, taken from around the 1.3465-1.3500 area on the chart.
That zone came into play on Monday morning and led to a pretty quick reversal.
USD/CAD Four-Hour Chart
From the weekly chart, that 1.3500 spot remains key and the reversal from that level this week keeps the door open for continued movement lower. The next major level is the same that helped to set support a couple weeks ago, around 1.3250, and a breach below that would give greater indication of the pair having topped already, which could then re-open the door for a run down towards 1.3000.
USD/CAD Weekly Chart
Chart prepared by James Stanley; USDCAD on Tradingview
When I looked at the US Dollar coming into this week, I had highlighted an ascending triangle in DXY but there was also another in USD/JPY. And if bullish USD trends were on their way back, the topside of USD/JPY could remain as an interesting spot as there’ve been no changes in the monetary backdrop out of Japan, at least not yet.
And as discussed previously, this can create a bit of correlation with rates trades as the Yen remains a favorite for carry traders, helping to fund positions with the low-yielding JPY. The other side of that, however, is that when rates are on their back foot and carry is unwinding, the counter-trend move can be aggressive and fast. We can see this visibly in the below four-hour chart of USD/JPY, which has traversed more than 1400 pips over the past month.
This week started with a bounce and a breakout from a short-term ascending triangle formation. But, resistance soon showed up at a trendline projection, and that helped to cap the high for the week as bears returned.
Bearish continuation is not a foregone conclusion at this point but neither is strength, as bulls were soundly throttled this week. But, the level of 138.50 remains key, and if buyers can hold support above that level, the door for topside bounces can remain open. But if sellers can push below the 137.67 swing-low, creating yet another fresh three-month-low, the door remains open for bears and there could still be a lot of room for them to run.
USD/JPY Weekly Chart
--- Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education
Contact and follow James on Twitter: @JStanleyFX
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