US Dollar Talking Points:
- The US dollar continued to retreat after last week’s FOMC rate decision.
- The Fed didn’t say anything specific but given the reaction in forex and equity markets, it seems hopes are building for a near-pivot for the US central bank.
- The analysis contained in the article relies on Price action And Chart structures. To learn more about price action or chart patterns, check out our DailyFX Education Division.
- Quarterly forecasts are released by DailyFX and written by me The technical side of the US dollar forecast. To get the complete write-up, click on the link below.
The US dollar continued its retreat after last week’s rate hike by the Fed. And as the June rate decision, the USD set higher stakes in the statement release, the greenback continued its pullback stance around the July meeting. Given the sharp drop in Treasury yields, many seem to be expecting a Fed pivot to be nearing. Or – on the other hand, it could be that investors are preparing for trouble ahead, loading up on long-dated Treasuries in anticipation of an eventual pivot if recessionary conditions continue to appear. I discuss this in next week’s equity forecastBut this is related to FX and the US dollar.
Be that as it may, falling yields are having a big impact across the market, and at this point, it’s positive for equities and negative for the US dollar. That’s par for the course for the past 13 years, where the Fed’s primary tool to fight slow growth and marginal inflation has been more accommodative in the form of rate cuts, or QE.
But, that is not the environment we are in now. Inflation remains at a 40-year high and although there are some early indications, perhaps a slight cooling – nothing is certain yet. And given recent comments from Fed members like Neel Kashkari yesterday, it appears the Fed plans to continue tightening as long as inflation remains under control.
From the long-term charts, the US dollar is close to recent highs Extended upper wick from last month’s recently completed candle At 76.4% shows a strong response from sellers Fibonacci retracement Major Action 2001-2008.
US Dollar Monthly Price Chart
A chart is prepared James Stanley; USD, DXY In the Trading view
From the weekly chart of the USD below, we can see where prices have retraced slightly below 50% of the recent topside trend, tracked from late May to the July high. There is also a support hold above 105 Mental level, which was also the first stage of resistance. This makes it an interesting spot for a potential pivot in the USD.
US Dollar Weekly Chart
A chart is prepared James Stanley; USD, DXY on TradingView
Going to the daily chart of the USD, we can get more granularity on the pullback move and there we can see A falling wedge formation Built, took form A bull flag. This leaves the door open for short-term bullish reversal scenarios, in this case, aligned with the direction of the longer-term trend.
For context, the 38.2% retracement from the recent bullish trend is a point of reference, as it coincides with the resistance portion of the wedge.
US dollar daily price chart
A chart is prepared James Stanley; USD, DXY on TradingView
As for the US dollar, there are some additional circumstances and that comes from EUR/USD. I have been talking about this ever since The parity level came into effect a few weeks ago. This is a key psychological level, and given how stretched the euro has been since that price action, a sustained break below the key level would require a substantial increase in motivation. That driver could be widening credit spreads in Europe, or fears of an even deeper recession taking hold in Europe.
Given how aggressively EUR/USD has sold over the past year and change, having fallen more than 2,000 pips from its May 2021 highs, and with the momentum moving of late, the pair may need to pull back a bit ahead of sellers. Finally that level of equality can be dropped. And if we look at EUR/USD from the daily chart, we can also see a range that could be the first step for such a pullback.
Note how EUR/USD has seen resistance from 1.0220-1.0233 for nine of the past nine trading days while building up. A rectangle pattern. This is the most stable range in what has been a very volatile pair in the past and it has held through the ECB’s lift-off 50 basis point hike and the Fed’s recent 75 basis point hike. That range was until yesterday, when prices were placed at the highest end of the day since early July. That move was tested outside resistance yesterday, with sellers teasing a topside breakout before re-appearing, pushing price back into the range.
This highlights, in my opinion, an oversold market in which sellers are afraid to open too close to the parity handle. This can lead to a pullback or reversal, essentially washing out some long-term shorts as a breach of near-term highs triggers trailing stops, after which the dominant trend may be poised to resume.
There is also a spot of interest for such a scenario and it is looking for a re-test of the 1.0340-1.0365 area, a 19-year low in EUR/USD before being taken last month.
The big question is whether the EUR/USD bears will pull back long enough to allow for a short-term breakout to propel the price to a possible point of lower-higher resistance.
EUR/USD Daily Price Chart
A chart is prepared James Stanley; EURUSD In the Trading view
GBP/USD cable correction
I started seeing a reversal potential in GBP/USD a few weeks agoAfter a falling wedge forms on the way down to fresh two-year-lows. Falling wedge formations Often tracked with the target of bullish reversals, predicting that the same lack of motivation at or around the low will eventually translate into a show of strength.
In GBP/USD, this is one of the more attractive areas for non-USD risk at the time given that structure. And in a few weeks, prices have continued to rise and GBP/USD is now at fresh monthly highs after breaking an aggressively bearish candlestick.
There is one Bank of England I’m not really sure how to factor that in other than the sheer value of Thursday’s rate decision and potential volatility. But, given the backdrop of the current price action, we could be at the forefront of a bullish trend if buyers can hold the line. Short-term support is shown around the eastern resistance level at 1.2187. A secondary position of slightly deeper support is around 1.2068.
And if sellers take to pushing prices back below the 1.2000-1.2021 zone, reversal scenarios will no longer be attractive.
GBP/USD eight-hour price chart
A chart is prepared James Stanley; GBPUSD In the Trading view
On that subject of central banks, we heard from the RBA last night and they weren’t as hawkish as previously heard. So, despite the 50 bp increase, AUD/USD has seen weakness and this is largely based on the tone set by the Bank through last night’s rate hike. To read more, Check out this article by Daniel McCarthy on the topic.
Regarding Price action – Like GBP/USD, AUD/USD has set recovery tones of late, with the structure in GBP/USD breaking out of a falling wedge structure that lasted slightly longer than the structure seen above. In AUD/USD, that wedge compression has seen the pair dove from the .7650 highs since late March to .6682, a move of about 1,000 pips.
The first part of the bounce appeared very quickly, about a week. But from July 20Th, there was a significant grind on the chart as the pair edged higher, eventually moving into a resistance zone spanning from the psychological level of .7000 to the Fibonacci level of .7053. This was the zone in the night game before RBA.
With the Reserve Bank of Australia sounding less-hawkish, the pair pulled back – and is now testing a key position of support at .6911. It is the same location that held last week’s low and plots near a key Fibonacci retracement converging with trendline resistance forming a falling wedge formation.
AUD/USD eight-hour chart
A chart is prepared James Stanley; AUDUSD In the Trading view
Given the continued decline in US Treasury yields, USD/JPY is pulling back from aggression. As seen several times in the past, when US rates are rising, USD/JPY’s top is attractive to carry traders. With the Bank of Japan still sitting on negative rates, higher US rates mean higher swap or rollover amounts and that could lead to higher demand in USD/JPY.
Higher demand in USD/JPY will help push prices higher – so Carry transactions Increased demand can bring profits from higher rates and higher prices as other traders follow suit. It’s a beautiful symbiotic scenario as it works and has been since March this year. Until recently, that is.
US yields continue to fall, Fed hiking further, keeping USD/JPY in deep pullback. And with the reversal picking up steam, other traders who followed the carry trade to USD/JPY are seeing a reversal.
Hence the phrase up the stairs, but down the elevator. That’s because when prices begin to slide in anticipation of what’s around the next corner, other traders may rush to react—which can create panic elsewhere, leading to more haste.
It’s still early – but given how the bullish trend has built, USD/JPY may have more room to slide if this theme continues to take-hold. The next major level of support on my chart is the 130 psychological level. If sellers are able to slice it lower-order, the bearish reversal theme may start to take on another level of interest. For now, the past Double top Support may prove at 131.25 and if the daily bar closes above that level, there may be short-term bullish scenarios to work with, essentially looking for prices to rally to a possible area of lower-higher resistance.
USD/JPY Daily Chart
A chart is prepared James Stanley; USDJPY In the Trading view
Written by — James Stanley, Senior Technician For DailyFX.com
Connect and follow James On Twitter: @JStanleyFX