US dollar price action configurations: EUR / USD, GBP / USD, USD / JPY, USD / CAD
Talking Points in US Dollars:
- The US dollar has so far spent October digesting the bullish movement that manifested prominently in late September.
- This week the focus is on a key report on inflation in the United States with the release of the CPI on Wednesday. With the potential Fed cutback announcement at the November FOMC corner, the focus on this data release is likely to be intense for risk trends.
- The analysis contained in the article is based on Price action and graphic training. To learn more about price action or chart patterns, check out our DailyFX Education section.
The US dollar continues to digest the September breakout, with price action now forming a symmetrical triangle during the first eleven days of October trading.
The USD hit a new annual high before the end of the third quarter, finally finding resistance at 38.2% Fibonacci retracement from last year’s sale, plotted at 94.47. This led to a pullback in trade in early October as prices moved lower to find support for the previous resistance, pulled from the high of 93.73 that set in August. But that rebound couldn’t eliminate Fibonacci resistance and price has since continued to curl, paving the way for a potential breakout with this impression of the CPI at just under 48 hours.
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Four hour US dollar price chart
Graphic prepared by James stanley; USD, DXY on Tradingview
Longer term US dollar
For the fourth quarter technical forecast, I initiated a bullish bias on the US dollar, due in large part to a breakout formation that has built up over the past four months. The USD had established an ascending triangle formation with horizontal resistance combined with higher-lower support. The bulls started to break horizontal resistance in late September, and with the appearance of the shorter-term symmetrical triangle, combined with the previous uptrend as part of this breakout, and there is another formation at work: the bull pennant.
Bullish pennant formation is often approached with the aim of continuing the trend, assuming the recent breakout needs to rest as new higher highs struggle to attract new buyers. But, if the force that caused the breakout in the first place can remain, there will often be a show of buyer’s support at higher lows.
And with inflation on the agenda for Wednesday, that potential is there for scenarios for the USD to continue bullish with the current formation matching that backdrop.
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Daily Price Table in US Dollars
Graphic prepared by James stanley; USD, DXY on Tradingview
EUR / USD: Short term bearish flag
Longer term, there is not much enthusiasm for EUR / USD at this time. The pair saw another bearish extension of the trend last week but sellers slowed down shortly after setting a new low. The corresponding pullback wasn’t exactly aggressive, with the uptrend from last Wednesday’s lows capping at around 60 pips.
The shorter-term setup may be a bit more exciting here, especially with the inflation numbers expected on Wednesday. The US reports at 8:30 a.m. on Wednesday, but German inflation is released before that, keeping the euro in the spotlight around these data points.
The short-term EUR / USD integrated into a bearish flag formation, accentuated by a bullish channel at the bottom of a downtrend. This leaves the door open for further bearish scenarios and short term resistance, the previous support point, drawn from the levels around 1.1600 and 1.1664, remains interesting.
If neither of these levels can hold the highest and a wider pullback starts to appear, the previous support area at 1.1709-1.1736 has yet to find resistance after this area broke in late September. key.
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Two-hour EUR / USD price table
Graphic prepared by James stanley; EURUSD on Tradingview
GBP / USD Snap Back for stress test
Last week, GBP / USD reacted below a key resistance area made up of two different Fibonacci levels, ranging from 1.3649 to 1.3678. There was a reaction that totaled around 100 pips in this move, but sellers weren’t able to innovate much below 1.3550. This led to a rebound in that resistance area, but this time the buyers were able to move higher in the area around 1.3678 which has since held steady.
According to the daily chart, this keeps the door open for short sideways swings. But, in the shorter term, there is a similar construction of higher lows with this horizontal resistance, which produces an ascending triangle which can be followed for short term bullish breakout scenarios.
Given the rate dynamics, with the UK perhaps approaching a rate hike in an attempt to contain inflation, any episode of USD weakness could work well for the top here in GBP / USD, especially if Wednesday’s inflation is lower than expected.
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Four hour GBP / USD price chart
Graphic prepared by James stanley; GBPUSD on Tradingview
USD / JPY: Big breakout near three-year highs
I’ve talked a lot more about this pair than usual since the FOMC’s rate decision in September. When the bank warned of possibly faster rate hikes, much of the attention turned to the USD. But JPY may have an even more aggressive argument for the attention of FX traders because of the deductive rate dynamics that went and started to play out.
The first quarter of this year can be used as an indicator: As U.S. rates skyrocketed in anticipation of the vaccine recovery and hope, U.S. rates surged, pushing the U.S. dollar up in many currency pairs. This strength was fully displayed in USD / JPY because not only was the USD well long on the back of higher rate themes, but the JPY was very bearish as the currency could then be used again with carry trades. With a Bank of Japan sitting on negative rates since 2016, there is little hope of a change anytime soon, so in a dynamic like the USD / JPY, where a currency is being bid on. the back of higher rates, the low rate yen could be an attractive counterpart to allow explosive moves.
This continued on USD / JPY and a number of other pairs as the weakness of the Yen keeps pace with the rising US rates. This was why the GBP / JPY was my “best trade for the fourth quarter”, seeking to exploit the expectations of higher UK rates to move forward with this premise of weakness in the JPY.
The USD / JPY crossed a big marker today, jumping to an almost three-year high. The earlier resistance zone had maintained highs in 2019, 2020 and, until this morning, 2021. It ranges from a long-term Fibonacci level of 111.61 up to the psychological level of 112.50.
With the pair’s prices so overbought right now, waiting for a pullback to support this earlier point of resistance seems like a more cautious way forward.
USD / JPY Weekly Price Chart
Graphic prepared by James stanley; USDJPY on Tradingview
USD / CAD Sinks Into Support As Oil Breaks Over 80
On the short side of the US dollar, the USD / CAD started to look more attractive. The Canadian dollar has remained fairly heavy in the recent pair. Notably, as the USD hit new highs against most other currencies over the past two weeks, USD / CAD was stuck for support last week, eventually falling below the 1.2621 mark.
This blackout theme accelerated Thursday and Friday as price action fell through the bottom of a symmetrical triangle and broke below the psychological level of 1.2500. This can make USD / CAD one of the more attractive short-USD candidates.
Lower-higher potential resistance exists at the psychological level of 1.2500 and a little higher, around 1.2546, which was the previous low just before last week’s breakout.
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USD / CAD Daily Price Chart
Graphic prepared by James stanley; USDCAD on Tradingview
— Written by James stanley, Senior strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX