US Dollar Talking Points:

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On Tuesday I asked the question as to whether the US Dollar had topped. And as I shared, I was of the opinion that it was far too early to make such a call as the greenback had set a fresh high just last Wednesday. It’s truly amazing how price action can change sentiment so quickly…

I pointed out a couple of spots of key support in the US Dollar and notably, these were taken from resistance that was in-play just a couple of weeks earlier. When the British Pound collapsed and GBP/USD went spiraling, DXY spiked-higher as GBP is 11.9% of DXY. So what looked like a massive reversal was really rooted from recovery moves in EUR/USD and to a much larger degree, GBP/USD.

But, as the USD was tip-toeing down to its support zone at 110.00, EUR/USD was making a move on the parity level, and GBP/USD was pushing up towards the 1.1500 area of resistance. Inflections showed at the round numbers and this helped to contribute to that bounce in the Dollar which is linked with sell-offs in EUR/USD and GBP/USD.

Tomorrow brings the next major driver for the US Dollar with the release of Non-farm Payrolls data for the month of September. With the market’s primary focus on whether or not the Federal Reserve is nearing some form of pivot on policy.

This has led to a focus on the data for signs of slowdown that may lead-in to some form of softening from the Fed. And with inflation remaining brisk near 40-year-highs, there’s continued motivation at the bank to continue hiking until the other mandate begins to come under pressure, and that’s employment. At this point, it might even be a fair argument to say that the Fed is targeting employment more than inflation as they’ve already hiked so much and the transmission of those rate hikes will take time. It’s signs of weakness in the labor market that will likely get the bank to do a double-take with the idea that rate hikes are beginning to adversely effect the American economy. And the next FOMC rate decision isn’t until November 2-3, so there’s still considerable time for markets to price in anticipation for that next rate decision.

US Dollar

I’m using largely the same levels that I had looked at on Tuesday. Support has built from an area of prior resistance that was in-play just ahead of the September FOMC rate decision. This plots around the 110 psychological level and it helped to bring a bounce to a fast and hard sell-off that had developed after the USD set a fresh high last Wednesday. Given the quarter-end, there could be some of that dynamic in-play but given how strong the trend was on the way up, as I shared on Tuesday, that sell-off was looking more like a pullback than a reversal.

Price has since bounced up to around another prior area of interest, which was prior support around the 111.78 area. And shorter-term, there’s the makings of an ascending triangle in here which could keep the door open for short-term bullish breakouts in the direction of the longer-term trend.

US Dollar Four-Hour Chart

USD h4 chart

Chart prepared by James Stanley; USD, DXY on Tradingview

USD Shorter-Term

Taking a shorter-term look below to focus-in on the ascending triangle: the high for the past two days has printed right at 111.78 and just above that is an area that was previously pretty messy. This could complicate near-term breakouts, but if bulls can push up to a fresh higher-high, the next spot of resistance is another area of prior support from around the 112.58 level.

US Dollar Two-Hour Chart

us dollar h2 chart

Chart prepared by James Stanley; USD, DXY on Tradingview

EUR/USD

EUR/USD rallied to start Q4, all the way until the parity level came into play. And I’ve been talking about this price for a long time in the pair: It’s a really big deal.

But, for this iteration EUR/USD couldn’t even test above parity as the high came in on most feeds at .99997, which is just 3/10th’s of a pip below the big figure. One-tenth of a pip is called a ‘pipette’ so this was three pipettes short of the parity handle but given the reaction, we can still see where the level had impact without having to actually come into place.

Think about it – if a stretched trend runs up to a level like parity and you’re looking at price just one pip below – do you feel bullish about continuation prospects? Well, others probably don’t either and that’s why we can see shifts in price action around major psychological levels.

At this point, prices in EUR/USD have pulled back and found support at prior resistance, taken from around the .9835 area. That led to a bounce into a possible lower-high at .9927 and if price can push below that .9835 support, we’d now have a fresh lower-high to go with a fresh lower-low, which would point to a move back towards the .9750 support level.

EUR/USD Four-Hour Chart

EURUSD four hour chart

Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD

Has the recovery run its course?

It’s always difficult to say but given recent price action it looks as though the 1.1500 level was a big deal in GBP/USD as we’ve seen tendencies of trend reversals in price action since it came into play.

A break back-below the 1.1210 level signals a return of bearish price action with a fresh lower-low, and this points to a move towards the 1.1000-1.1019 area on the chart.

GBP/USD Four-Hour Price Chart

gbpusd four hour chart

Chart prepared by James Stanley; GBPUSD on Tradingview

USD/CAD

We have another example of a major psychological level having a major impact on price action in USD/CAD, as the 1.3500 level came into play to bring in a bounce. And the setup here is very similar to the DXY setup looked at above, with a bounce at a key area leading into a bullish push into the longer-term trend.

The primary difference in my eyes between USD/CAD and DXY is the lack of ascending triangle in USD/CAD. I’d be a bit more cautious here given that there’s not that line-in-the-sand for resistance like we saw in DXY. But – there is a key swing level just above, around 1.3730, which if in-play, highlights a near-term higher-high, after which higher-low support could be sought out at the 1.3652 Fibonacci level. A move of that nature could bring back in the picture the 1.3833 swing high.

USD/CAD Four-Hour Price Chart

USDCAD chart

Chart prepared by James Stanley; USDCAD on Tradingview

USD/JPY

This remains a tough situation for me as it still seems like a game of cat and mouse. The BoJ (at direction of the Finance Ministry) as defended the 145.00 level and that’s now thought to be the line-in-the-sand for USD/JPY. And thusly, that’s held as a pretty consistent area of resistance ever since the intervention.

So, looking to topside breakouts is, in essence, either expecting the BoJ to modify their stance, of which there’s been no signal of, or, the expectation for something to break in Japan to where they can no longer defend that line-in-the-sand. And the BoJ is carrying massive balance sheet but the question remains as to whether the BoJ will abandon their yield curve control strategy, which doesn’t seem likely.

So, the topside of the pair is unattractive in my view because, in essence, it’s expecting Japan to break which I don’t expect.

The underside of the pair isn’t much better, however, as the carry is still heavily-tilted to the long side of the USD and holding positions open in the pair could remain as a costly endeavor. This disincentivizes long-term shorts and in-turn I can’t imagine a backdrop where that scenario is attractive outside of some flip at the Fed or some massive risk aversion that causes Yen-shorts to cover.

As I shared on Tuesday, what could be attractive are dips to support, at which point the long side of the pair which is still supported by the carry could become attractive again. We had one of those such moves later on Tuesday, with prices dipping down towards support at 143.50 at which point they bounced right back-up towards the 145.00 level. So, patience appears to be the name of the game here, until something changes.

USD/JPY Four-Hour Chart

usdjpy four hour chart

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





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