US Dollar Talking Points:

  • The US Dollar is testing another spot of support this morning at the 103 handle on DXY.
  • EUR/USD has pushed up to a fresh seven-month-high while starting to test a big zone of resistance. USD/CAD continues to be one of the more attractive bearish USD setups while USD/JPY tests a key spot of support after breaking out from a falling wedge last week.
  • 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.

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The US Dollar is testing a major spot of support… again.

Coming into the year the USD had held the lows right around the same price that had come into play a couple of weeks prior, just after a CPI report and an FOMC rate decision helped to drive weakness into the currency. Taking a step back, there was a massive zone of longer-term support that price had already begun to test. I’m plotting that zone from the 2020 swing high up to the 2017 swing high, which runs from 103 up to 103.82.

US Dollar Weekly Chart

Chart prepared by James Stanley; USD, DXY on Tradingview

The shorter-term support that was holding into the end of the year was pretty much in the middle of that area, plotted at 103.45. Last week saw a strong bullish response, at least initially, before much of those gains were pared and price retreated towards its weekly open after an abysmal Friday PMI report.

But, as looked at yesterday, the weekly bar for DXY took on the form of an inverted hammer formation. These are often found near bottoms as they indicate a market that tried to rally but just couldn’t hold the bullish move. The fact that bulls tried, and that price reacted to support is, in and of itself, a change of pace from the back-breaking sell-off that enveloped the currency in Q4.

The daily bar from Friday, however, finished as a bearish engulf, which is often tracked with the aim of bearish continuation. And this is precisely what showed yesterday as sellers pushed the USD down to a fresh six-month-low. And that’s when the bottom of that support zone came into play, helping to elicit an initial response of strength.

On the below daily chart, we can see the follow-through from that engulf that ran into the 103 area yesterday before a bounce began to show.

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US Dollar Daily Chart


Chart prepared by James Stanley; USD, DXY on Tradingview

USD Shorter-Term

At this point the support test is still quite early. Buyers have pushed price up from 103 but, as yet, haven’t been able to make much ground above prior support, which is right around that 103.45 level that was holding the low into year-end.

On a very short-term basis, defense of support at 103 keeps the door open for higher-low support, which would be an early-stage indication of bullish potential, which keeps the door open for strength continuation scenarios in the DXY. But, this has been a harsh sell-off, so the reversal will also likely be contentious if/when it plays out.

US Dollar Two-Hour Chart


Chart prepared by James Stanley; USD, DXY on Tradingview

EUR/USD Resistance Test

If the US Dollar is going to rally from a low, it’s probably going to need some help from EUR/USD. The Euro is a whopping 57.6% of the DXY and as we’ve seen this spate of weakness in the Greenback there’s been a mirror image bullish move in EUR/USD.

Just yesterday EUR/USD hit a fresh seven-month-high while starting to rest a major area of confluent resistance. The pair almost tested this price in December when the trend was in full bloom: But bulls pulled back before it could come into the equation. There’s a Fibonacci level at 1.0747 which is the 61.8% retracement of the same study from which the 50% mark just helped to set support on Friday. Above that at 1.0750 is a psychological level and a little higher, at 1.0787 is the current eight-month-high in the pair.

With that zone being just a bit above the prior high, this opened the door for reversal scenarios after fresh breakouts this week. I talked about this in this week’s USD Technical Forecast.

That resistance is now in-play. The big question is whether sellers will continue to respond. Notably, the major driver for the USD this week is on Thursday with the release of CPI data.

EUR/USD Daily Chart


Chart prepared by James Stanley; EURUSD on Tradingview


While EUR/USD has just set a fresh seven-month-high, GBP/USD has not. The pair is continuing a bounce from a key Fibonacci level, however, and short-term trends still appear to carry some bullish potential.

From the four-hour chart below, we can see the bounce from the 1.1843 Fibonacci support level last Friday continuing. Yesterday marked a short-term higher-high, with prices now pulling back to test higher-low support at prior resistance, around the 1.2105 level. A defense of support here keeps the door open for bounces with next resistance a bit-higher, around 1.2223, after which another Fibonacci level comes into play at 1.2303.

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GBP/USD Four-Hour Chart


Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD Bigger Picture: 1.2000 is the Key

Taking a step back on the chart and we can see the recent value behind Fibonacci levels at 1.1843 and 1.2303, which have helped to set both recent resistance and recent support.

The bounce last week was particularly significant given that a weekly loss was quickly erased as the weekly bar printed a dragonfly doji. A failure from bulls to hold above 1.2000 indicates that sellers are using that bounce to better position for longer-term trend potential, so the psychological level retains some interest here, particularly given the juxtaposition between short and long-term pictures in the pair.

GBP/USD Weekly Chart


Chart prepared by James Stanley; GBPUSD on Tradingview


There seems to be some continued shift here: While USD/CAD was one of the more attractive pairs for working with USD-strength in the second half of last quarter, that theme has shifted, and the pair now looks like one of the more attractive ways to approach USD-weakness.

Friday posted a massive bearish engulf in the pair that was far more powerful than the daily bar on DXY, indicating the addition of CAD-strength to go along with USD weakness. For USD bears that are looking for another low in DXY, USD/CAD can be of interest.

The psychological level at 1.3500 had previously offered support on a couple of different occasions and a pullback with a resistance test there could re-open the door for short-side swing setups.

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USD/CAD Daily Price Chart


Chart prepared by James Stanley; USDCAD on Tradingview


USD/JPY started the year with a bang, dropping down to the 130.00 level that it did not seem to want to test in Q4. But that’s also around where support started to build and coming into the first week of the year, a falling wedge formation had formed.

Such formations are often approached with the aim of bullish reversals and when the USD went on its bullish jaunt last week, that seemed like what we were getting.

But the breakout got caught at a major price level on the chart, the same ‘r3’ resistance I had looked at last week at 134.45. That led to a sharp pullback, all the way back to prior wedge resistance which, at the time, was confluent with a prior support level of note at 131.25.

That support has since held, and bulls are working on another breakout setup from last week’s ‘r2’ at 132.33. This keeps the door open for bulls and if 131.25 remains defended, that case can be made.

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USD/JPY Four-Hour Price Chart


Chart prepared by James Stanley; USDJPY on Tradingview

— Written by James Stanley

Contact and follow James on Twitter: @JStanleyFX

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