Topics of conversation about the US dollar:
- It was a week of pullbacks in the markets as stocks rose and the dollar fell despite a seemingly negative backdrop of disappointing corporate earnings.
- The big driver is next week FOMC rate decision and Friday morning drivers loom large as hopes for a more dovish Fed emerge after an expected 75bp hike. next week.
- For USD – before we get to the Fed we have tomorrow’s European Central Bank rate decision and the big question is whether Lagarde can trigger anything more than a brief cut EUR/USD.
- The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
Recommended by James Stanley
Download our USD forecast
I took a look at the US dollar on Monday and I highlighted a counter-trend that was brewing and, technically, already worked.
The US dollar set a double top after last week’s failure to break 113.92. This price was the same level that changed the advance a week earlier after another very hot inflation report. The fact that the US dollar showed pullback potential despite a seemingly bullish greenback gave the impression that something else might be going on related to moods or potentially from an equivalent. And there still appears to be hope that a Fed turnaround is on the way, helped by the events of last Friday morning, which I discussed in Monday’s article.
That Friday’s push started a double-up on the same day as a second high. Prices held a line at a key support point, which was the formation neckline near 111.74, which itself was a previous resistance point from the ascending triangle the formation that I was operating since earlier this month on USD. This level was held in Monday’s trading, after which a descending triangle revealed to be a bearish formation indicating possible breakout potential.
what breakdown yesterday started to seriously make a strong sharp decline, finding support at the s1 spot around 110.79. And this morning, the price has returned to the same zone that was in play a few weeks ago, in early October, even longer, starting from the mass of the merger with 110 psychological level to 110.25 Fibonacci level.
For now, it holds the lows of the US dollar this morning.
Two-hour chart of the price of the US dollar
Has the US dollar topped out?
Markets have an obsession with tops and bottoms. As I often share, I’m less interested in this than the price action: because whether the market has topped or not, we won’t know for sure until it’s too late (and thus no more action). I’d rather put myself in a position to maximize the potential than wait weeks to confirm a top or bottom.
But to characterize this move, one only has to look at the important move of 2022 and they will notice that the move was only a 23.6% retracement of this year’s jump. And this retracement level is another focus in this converging support lot, which is from the psychological level of 110 to the Fibonacci level of 110.25.
Weekly chart of the US dollar
I prepared the diagram James Stanley; USD, DXY on Tradingview
Well, we’re waiting – hit the dollar or not
I’m guessing that didn’t happen, but that’s a guess and I’m going to be straight with you. I don’t know if this is as high as anyone else, and in trying to form this assumption into a hypothesis, it highlights the fact that just a week ago these USD trends were still hot. Until Friday’s reversal, just before the Fed’s blackout window.
I believe what we are seeing is due to sentiment following a sustained rally in the US dollar, fueled by the collapse of the British pound at the end of September. GBP plays a big role in the DXY, so when the pair went into full bearish mode, the USD surged higher before retreating. This is what created the wide wick on the weekly and monthly charts, and if you look at it in a vacuum, of course there are symptoms of a top, mainly in an elongated wick that sits on a pryce. A very visible reversal is often one of those things that traders can look at to try to find tops, assuming that a pocket of liquidity has come into play at a major level that can tip the flow of the trend. Here is where pin-bar formations comes from what we saw in GBP/USD at the end of September around that collapse that looks like a move.
The big test, of course, is next Wednesday’s FOMC rate decision: Will the Fed soften its blow? Or will we see a repeat of Jackson Hole, with Jerome Powell declaring that inflation has not yet been tamed and the Fed is unwilling to consider that prospect yet, because the risk of inflation, even with all this annual tightening, is too great to bear.
Before we get there, though, there’s one more thing to do, and that’s tomorrow ECB rate solution…
For USD technical levels, I am tracking the next support in the 109.14-109.27 zone. And along the way, 109.62 comes into play, which as I explained on Monday is a projection from the double top break.
Four-hour chart of the US dollar
I prepared the diagram James Stanley; USD, DXY on Tradingview
I’ve talked about this a lot this year, but Euro is the largest part of the DXY index at 57.6%. The rationale is indeed a relic, as DXY was created in 1973 in a much different economic environment, well before the creation of the Euro. And the index was heavily based on a number of euro-linked currencies such as the German mark, the French franc, the Spanish peseta, the Dutch guilder, etc. And when the euro was created, these allocations were simply combined into one “euro” allocation.
Is this a good barometer of the US dollar’s impact on the global economy today? Probably not, because there is no exposure to China, and the role China plays in world markets has changed dramatically since 1973, but the DXY hasn’t really changed.
However, it does highlight a point that is important to the US dollar. It will be very difficult for the dollar to move in any direction without at least some help from the euro. This year’s scorching bullish trend in the US dollar has been matched by a mirror image of the single currency’s massive sell-off this year. And if we look at interest rates, there’s little question why. But there was also quite a bit of fear given what had changed since February.
In the chart below, we see a bearish trend in EUR/USD that took on new life after February when Russia invaded Ukraine. It brought the war to the eastern border of Europe, but perhaps more importantly for the economic consequences, it disrupted supply chains and took away a major asset of cheap energy. This raises the question of the future, which is reflected in this table below.
Note the more aggressive angle on the last one trend line which arose in February.
EUR/USD weekly chart
EUR/USD in the short term: rally ahead of the ECB
Last week I started looking at the potential for a pullback in EUR/USDhighlighting a series of higher lows that have begun to mature.
And then this week started with a push to the merged resistance area at 0.9900, which is both a psychological level and a trendline projection. As I shared in call on monday, this gave the impression that a bullish move had begun, with two resistance levels overhead at .9950 and 1.0000. I would expect a group of stops above each to act as an engine if price is able to break higher as stops on the shorts “buy to cover” increasing market demand.
And based on the movements of the last two days, where the price has accelerated through each of these resistance levels, it looks like that is the case.
So, for now, I think this is a short script. They may continue for a while, but whether or not they do will depend on how hawkish Christine Lagarde is at tomorrow’s ECB meeting. And a short squeeze could quickly turn into a rally, but that would likely require both a much more hawkish ECB tomorrow and a much more dovish Fed next week; a prospect I find unlikely at this point, but after that I’d be remiss to dismiss it entirely.
I track the next resistance at 1.0095 and 1.0198, after which the main area comes into play around 1.0350.
EUR/USD daily chart
I prepared the diagram James Stanley; EURUSD on Tradingview
— Written by James Stanley, DailyFX.com Senior Strategist and Managing Director DailyFX Education
Connect with James and follow him on Twitter: @JStanleyFX