US Dollar Talking Points:
- This morning brought another jaw-dropping inflation release. But, notably, the US Dollar quickly gave up gains after that release.
- The US Dollar is working on its fifth day of resistance at the 103.92 level. Going along with that theme, EUR/USD is working on its 10th day of support at 1.0500, and USD/JPY has been mostly range-bound since the April 28th inflection.
- This begs the question as to whether the US Dollar is prepping for a pullback. The fundamental picture remains bullish USD, but that move has priced-in very well over the past year. A pullback could re-open the door to longer-term bullish USD strategies.
- 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.
Trends don’t build in straight lines, but you probably knew that already. And, to be frank, after watching USD for the past year you could be forgiven for being mistaken of such a fact, the bullish trend in the greenback has been nothing short of astounding. From the May 25th 2021 swing low, the USD has gained 16.36%. And while that may not sound like much, particularly if we’re comparing to stocks or bitcoin – this is in an unlevered currency, making the size of that move all the more astounding.
Along the way, we’ve seen some significant trouble price-in to counterparts. The Euro has seen the bottom fall out, particularly against the USD as the deviation in policy between the two representative Central Banks still has yet to settle. The Fed is hard set and fast on hiking while the ECB, well, they’re the ECB, and have been typically dovish. The Bank of Japan hasn’t been very hawkish either, as USD/JPY has ascended to 20-year-highs. And then last week, we saw GBP/USD plummet as the Bank of England warned of a recession ahead.
The quandary at this point is related to near-term trends. Despite this continued divergence in policy between major economies, the US Dollar has stalled at resistance while USD/JPY has done the same, along side EUR/USD and GBP/USD stalling at support after sizable moves. At this point, it seems as though the US Dollar is priming for a pullback – and that wouldn’t necessarily offset the bullish fundamental bias on a bigger-picture basis.
Taking a step back to look at the US Dollar with some scope highlights just how incredibly important the current zone of resistance is. This is the same area that caught a reversal in 2016/2017. It’s also the same zone that came into play in the midst of the pandemic panic in March of 2020. This is a tough area for the USD, as is, but if we consider how quickly it came into play over the past 11 months, and there’s more reason for caution on continuation approaches.
US Dollar Weekly Price Chart
Going down to the daily chart highlights some of that recent consolidation. As we can see from the higher-highs beyond resistance there’s still been a bullish drive, although not to the degree of what was showing just a month ago. And given the size of the move, there’s a number of longs that are likely using that probe above 103.82 to remove some exposure.
This, on its face, could look attractive for pullback potential. Buyers have remained active, as evidenced by last week’s quick reversal after the Fed. But, the market still appears to be somewhat overbought given the failure to punch up to and sustain fresh highs.
I’ve added three support levels of interest on the below chart, with an aggressive level nearby at 103, another level a bit deeper at 102.36, and a third zone that runs from 101.42 up to 101.80.
US Dollar Daily Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD: Dead Drop Finds Support, Builds Range
Going along with that surge in the USD was a fast and heavy drop in EUR/USD. The pair ran into the 1.0500 level in late-April and, ever since, bears have been put in check. Prices have ranged in the pair with support holding for 10 trading days now, and while this isn’t necessarily a direct sign of strength on the way – it does indicate that EUR/USD is oversold similar to how USD is showing symptoms of being overbought.
And absent a driver to compel fresh shorts to take on exposure sub-1.0500, this can prime the backdrop for pullback potential. The 1.0633 level that I was following for this approach came into play last week after the Fed. So, I’ve added a couple of additional resistance levels to plot for pullback potential, looking to a spot at 1.0695 and another around 1.0767.
EUR/USD Four-Hour Price Chart
Similar to EUR/USD, USD/JPY was in the midst of a one-sided trend for quite a while, with a massive move from the March open that held through much of April trade. But, the pair has finally found a level of resistance that’s been able to hold, around 131.25.
At this point, there’s an aggressive bullish trend-line that’s finally being tested through. A recent lower-low combined with a push back below the 130 psychological level gives the appearance of more pullback potential, and there’s a spot of support on the USD/JPY chart around 128.71 that remains of interest.
USD/JPY Four-Hour Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX