US Dollar Price Action Setups as Risk Aversion Takes Another Swing
US Dollar Talking Points:
It’s been quite the twist in the US Dollar over the past few trading days. Tuesday brought a weak Dollar and a bearish test below the 95.00 level; but that theme has completely reversed course and US Dollar strength is showing quite prominently now as the currency pushes towards the 96.00 level that brought two different resistance tests earlier in October. This comes amidst a backdrop of continued potential around risk aversion: The equity recovery looked at over the past couple of days has come under fire after sellers started to make a push below short-term support. In US equity indices, like the S&P 500 and the Dow, the potential for longer-term bullish strategies remains as the support that set-in last week has yet to be taken out. But short-term, there is potential for a deeper bearish move, and this is worthy of traders’ attention in the coming days.
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Dollar Strength Comes Roaring Back
The move in the US Dollar over the past two days has been rather pronounced, and the pace with which this has come in is reminiscent of the bullish run in the Greenback in April-May and again in early-August. In each of those instances, risk aversion was the primary push point as fears built around Italy and then around Turkey. Given the pace of recent headlines, it appears as though that worry is coming back to the fray, and when combined with the Dollar strength that’s been rather clear over the past few days, this keeps the door open for additional upside.
On a technical basis, DXY is fast approaching a big level at 96.04. This is the 50% marker of last year’s bearish run, and this level helped to elicit two different doses of resistance earlier in October. A topside break through this resistance opens the door for a retest of the Fibonacci level at 96.47, which had come into play in mid-August just before USD reversed. This is the 23.6% retracement of the same major move that helped to provide the February low.
US Dollar Four-Hour Price Chart
EUR/USD Retests Big Zone of Support
That move of strength in the Dollar has been very visible in EUR/USD, where the pair is testing below the 1.1500 area again. And given the pace of the headlines along with price action in USD and the building wall of worry around a variety of themes, the potential for continued bearish price action remains. The complication at this point is one of chart position, as prices remain in a zone of support that’s been fairly stubborn of recent.
EUR/USD Daily Price Chart: Stubborn Support Zone
GBP/USD Setting up for 1.3000 Re-Test
The British Pound is tilting lower as Brexit headlines continue to make waves, and that prior short-term trend of strength has unfolded as sellers have pushed prices below the 1.3100 handle. At this stage, prices are nearing a confluent area around 1.3000, as this psychological level intersects with a rising trend-line that can be found by connecting the August and early-October swing-lows. A support show here opens the door for short-term bullish plays; but if prices break below the trend-line, amounting to a support break of a symmetrical wedge pattern, the door opens up for bearish strategies in the pair.
GBP/USD Four-Hour Price Chart
USD/JPY Bulls Take a Step Back as Risk Aversion Takes Hold
Earlier this morning, I had looked at the building setup in USD/JPY as an indication of risk on/risk off themes. Since then, that risk aversion theme has grown in prominence and this has been coupled with a support break in USD/JPY as that bullish theme from the past week comes into question. If markets do continue with bearish potential, Yen-strength will likely retain a preference against the US Dollar, similar to what was seen last week when equity sell-offs were really pricing-in.
USD/JPY Hourly Price Chart
AUD/USD Holding Support at the .7100 Handle
Given the pace of USD strength, a trader might’ve expected a deeper bearish move in AUD/USD. But, prices are largely remaining in the range that’s been in place for the past week.
AUD/USD Hourly Price Chart
NZD/USD Build of Bullish Structure
Worthy keeping an eye on: While USD strength is rather pronounced in many other markets, NZD/USD is continuing to show bullish potential with higher-highs and higher-lows. Prices are currently testing an area around the prior higher-low, and a hold could be approached in a bullish fashion, looking for a continuation of higher-highs and higher-lows.
NZD/USD Hourly Price Chart
EUR/JPY Throttles Lower As Risk Aversion Picks Up
EUR/JPY had started to show signs of recovery earlier this week as price action meandered above a bull flag formation that’s held in the pair from the last week of September. I had closed the prior short-side setup and flipped long, looking for that theme of support holding above 129.10 to remain. That support was taken out this morning, and the selling didn’t stop there as prices continued to slalom lower. At this point, a big support level is being tested now around 128.52. This could potentially be used for bullish reversal strategies for those looking to implement a bullish Euro bias.
EUR/JPY Eight-Hour Price Chart
US Equity Rally Unwinds
This was a centerpiece of this morning’s market talk as equity markets were holding on to higher-low support from the Tuesday ramp. At the time, there was alignment of the longer-term bullish theme in US equities and the shorter-term trend of strength as brought upon by the earlier-week higher-highs and higher-lows.
That short-term rally came unwound earlier this morning when sellers pushed below support. The longer-term potential for strength remains, and that will be the case until last week’s lows get tested/taken-out. But on a shorter-term basis, the door may be opening for bearish strategies if there’s a continued build of bearish structure, as brought upon by resistance at prior support after fresh lower-lows.
Dow Hourly 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 Q4 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.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX