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

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

James Stanley, Senior Strategist

US Dollar Talking Points:

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It was a fast and steep drop in the US Dollar that started a week ago. US CPI printed at 7.7% and stocks rocketed higher as the US Dollar put in a rather dramatic drop that continued into the early portion of this week. A bounce began to show on Tuesday as Fed-speak continued to take on a more and more hawkish tone. I had highlighted this as a factor in this week’s equity forecast, as it seemed a likelihood in response to the massive risk rallies that had shown after the November FOMC rate decision.

And that theme has pertinence to both currencies and equities, and the common conduit is bonds and rates. Of late, FOMC members have been reminding markets that they’re not done with rate hikes and inflation remains a problem.

In the US Dollar, the big question is whether the short-term bottom is in. From the two-hour chart below, we can get a bit of reference on the matter as the DXY is trying to climb up to a fresh near-term high. I’m tracking that at 107.27. A break-above that level opens the door for a move up to 107.79.

US Dollar Two-Hour Price Chart

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Chart prepared by James Stanley; USD, DXY on Tradingview

USD Daily Chart

It’s the daily chart that’s of interest for USD strength scenarios, and again this is based on the early observation of possible near-term bottoming. The extended wick on Tuesday highlights a strong intra-day reversal and so far, that’s led to higher-lows. There’s no higher-highs yet which is why the above resistance is in such focus, but if that happens and we can pair these higher-lows with a higher-high, the door opens for bullish short-term scenarios. The levels at 107.79 and 108.43 loom large as overhead resistance.

US Dollar Daily Chart

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Chart prepared by James Stanley; USD, DXY on Tradingview

EUR/USD: Has it Topped?

I started looking at the bullish side of EUR/USD late last month as a series of higher-lows began to develop on the daily chart. That theme started to take-hold as price pushed back up to resistance at the .9900 handle, and then finally a strong breakout started to show in late-October.

Since then, EUR/USD has been in the driver’s seat. And as I wrote just ahead of last week’s CPI print, EUR/USD performance could have an even more impactful push onto DXY than even the CPI data, and I believe that came to fruition to a degree, as the CPI print was still pretty-elevated. But the move in DXY was outsized and in my opinion, EUR/USD short cover played a large role.

EUR/USD made its way back up to a massive level earlier this week at 1.0350. This was the swing-low in 2017 and it helped to set support in May and June before becoming resistance in August. Bulls forced a break of that level on Tuesday but that’s when the pullback began to show, which left an extended wick sitting atop the daily candle on Tuesday, and that’s been followed by a lower-high yesterday and continuation so far today.

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EUR/USD Daily Price Chart

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Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Shorter-Term

That 1.0350 level came back into play as support yesterday but the following bounce simply led to a lower-high. That led to a short-term descending triangle that’s starting to fill-in, and the next support below is a familiar Fibonacci level at 1.0282. A break of that level opens the door for a move down towards the psychological level at 1.0250, after which the 1.0174-1.0198 zone comes into the picture.

EUR/USD Four-Hour Price Chart

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Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD

Cable put in a resistance test at the 1.2000 psychological level on Tuesday and that’s currently helping to mark the three-month-high in the pair. A resistance reaction on Tuesday led to an inside bar on Wednesday and so far today, prices are peeling lower in response.

Price action is testing a key spot of support around the 1.1750 psychological level and if bears can force a push through that, 1.1646 seems pertinent as this was a spot of resistance-turned-support. If USD bulls are going to evoke a revival of the long-term trend, this puts focus back on the 1.1500 level in GBP/USD.

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GBP/USD Daily Chart

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Chart prepared by James Stanley; GBPUSD on Tradingview

USD/CAD

Can USD/CAD bulls continue the move?

I had looked into USD/CAD yesterday as support had held for four days at a familiar spot of prior resistance. This was around the 1.3250 psychological level and that’s since led into a bounce. Initially, that bounce ran up to resistance at another prior support zone around 1.3350. But, that move is showing another short-term breakout this morning and this opens the door for a run up to the 1.3462-1.3500 area of prior support.

USD/CAD Daily Chart

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Chart prepared by James Stanley; USDCAD on Tradingview

USD/JPY

Carry unwind can be a vicious thing…

When a carry trade builds, traders often look to hold on to long-term positions in the direction of the carry. And this has a two-pronged impact as both the rate differential helps to drive in more traders in the direction of that trend, which can lead to an elongated move such as we saw in USD/JPY over the past couple of years. The monthly chart below helps to put that into scope.

USD/JPY Monthly Chart

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Chart prepared by James Stanley; USDJPY on Tradingview

Carry Unwind

When the prospect of change shows up in the initial driver behind that carry, things can go sideways very quickly. If traders are jumping into the trend with the primary drive of capturing carry, with trend continuation as only a component of the setup, the prospect of that carry decreasing can begin to cause an exodus.

And this is why the pair sold off so quickly as rates were dropping over the past week: Fear, because traders that bought into the trend at 147 or so were probably pretty uncomfortable with 700 pips of adverse excursion. That can lead to more unwind as bulls bail.

The question is whether that’s now over, and this likely relates to whether or not rates have ‘bottomed’ in this recent move, which can also tie to USD dynamics.

From the four-hour chart we can get a better view of this attempted recovery. Price has pushed back above the psychological level at 140.00 and at the moment, a spot of prior resistance-turned-support is showing as short-term resistance at 140.80. A breakout there opens the door for a move up towards the 141.50 level, after which 142.50 and 143.29 come into the picture. On the support side of the coin, a pullback to 140.00 could keep the door open for bullish scenarios as that would be a higher-low from the 139.39 spot that was in-play yesterday.

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USD/JPY Four-Hour Price Chart

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Chart prepared by James Stanley; USDJPY on Tradingview

--- Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

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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