US Dollar Price Action Talking Points:
- The US Dollar is holding near two-year-lows as the 2020 close fast approaches, with one remaining FOMC rate decision on the economic calendar.
- While the wide expectation appears to be for continuation of USD weakness to go along with equity and commodity strength, the door may be opening for some contrarian scenarios in Q1 of 2021, especially given how aggressively sentiment appears to be pushing the risk-on theme with so much unsettled in the backdrop.
- 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.
We’re now almost two weeks from the end of 2020 and I’m sure many are waiting to happily put this year in the books. Perhaps the most memorable takeaway from where we’re at now is just how well global stock markets have performed, all factors considered.
While Central Bank stimulus and government support has been key for the revival across Wall Street that hasn’t yet shown, across main street, it seems that many financial prognosticators have built in the expectation for that to continue, following for a continuation of USD-weakness as the anything-not-stapled-down trade continues to see support. This, of course, includes stocks and commodities and even after near-historic runs in those asset classes, it seems the wide expectation is for that to continue.
As discussed in this webinar, my expectation is a little bit different. I think that we’ll see a rush of risk aversion in Q1, likely driven by ongoing challenges with the pandemic that may not be artfully offset by deft government action.
Frankly – the US Dollar is extremely oversold as equities appear overbought. I’m not going to consider the fact that the Fed may lose control of the matter long-term because, as Jerome Powell said in the month of May on the television program 60 Minutes, ‘there’s no limit to what we can do with the lending programs available to them.’
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I fully expect those short-term lending programs to remain at the disposal of the Fed under incoming Treasury Secretary, Janet Yellen. The bigger question is whether the bank will be able to head off all risks before they create a market impact, and this is what I’m looking for in the first-half of next year. This would be similar to the frightful few weeks in March when the Fed would open the week with yet another announcement of support, only for markets to continue selling off. It wasn’t until March 23rd that support finally did set in; and this happened because the Fed just continued to press the matter until eventually something caught.
But – make no mistake: The stresses in short-term lending markets showed up last year, before the coronavirus, and I think that it would be premature to call it fait accompli that those problems have been fully addressed even with the troves of stimulus that came online this year in response to the pandemic.
To learn more about how Central Bank Intervention Impacts Markets, read more from DailyFX Education
With that said, the US Dollar has been taken to the woodshed in the last nine months of 2020. It’s difficult to predict that what’s been happening won’t happen any longer and, all of the sudden, something new is going to take place. So, at this point, I’d look for a near-term retracement and this is something that could come into play around the final FOMC rate decision of 2020. As looked at in the webinar, there’s some unfilled gap from this week’s open, and that can be a short-term zone of resistance to follow.
US Dollar Weekly Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD: Resistance Hold v/s Inverse Head and Shoulders Pattern
It’s been a surprisingly strong year in EUR/USD, owed in part to the massive sell-off in the US Dollar. The European Central Bank hosted a rate decision last week and as was widely-expected, extended their stimulus program. But, despite some early excitement around the announcement, the pair hasn’t really done much since early-December.
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EUR/USD Eight-Hour Price Chart
Chart prepared by James Stanley; EUR/USD on Tradingview
As they say, the devil is in the details, and for traders those details can often find greater granularity on shorter-term charts. By driving down to the two-hour-chart, an inverse head-and-shoulders pattern becomes visible. This keeps the door open for bullish breakout potential, looking for buyers to finally find the motivation to push through the 1.2167 Fibonacci level that was looked at earlier this month.
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EUR/USD Two-Hour Price Chart
Chart prepared by James Stanley; EUR/USD on Tradingview
USD/JPY: Can the Yen Remain Weak Without Abe at the Helm?
On the short-side of the US Dollar, I think that USD/JPY remains compelling. The history here is of note, as USD/JPY had displayed a penchant for weakness (Yen strength) until Shinzo Abe came into the equation in 2012. Abe’s big drive was his economic reforms, of which with hindsight the most impactful was Yen weakness.
This helped USD/JPY jump by more than 50% from the 2012 lows to the 2015 highs. But another 2020 news item that was perhaps obscured in the Western World by everything else that was going on was the fact that Abe has stepped down and the question remains as to how much ammunition the Bank of Japan may have left.
This can keep the door open for bearish scenarios in the pair, particularly if we do see that risk aversion theme showing up, even if only temporarily. On the weekly chart below, the item of note is the continuation of lower-highs to go along with the horizontal support that’s been in-place since 2014. This isn’t quite a descending triangle but has similar tonalities, as there’s a horizontal support zone that’s been bringing buyers into the equation; but that’s showing a diminishing marginal impact, leading to the idea that it may eventually break.
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USD/JPY Weekly Price Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
