US Dollar Talking Points:
The US Dollar has finally pulled back after a forceful move up to another fresh yearly high.
I had looked at this in-depth in yesterday’s webinar so rather than re-hashing a lot of what’s already been said, I’ll merely focus on the key facts.
The US Dollar has been holding a bullish trend inside of an upward-sloping channel for going on a full year now. More recently, that topside trend has gotten a major shot-in-the-arm as the Fed has hurriedly tried to prep markets for a fast re-pricing of rates this year. And, at this point, markets are actually expecting another nine rate hikes out of the Fed by the end of this year. This would be a stark change-of-pace for the bank but, given inflation and the impact that it’s already showing in the American economy, where it’s started to impact political numbers, the calls for change have grown so loud that it seems that the Fed can no longer ignore the inflation that’s continuing to jump in front of our eyes.
But, from a trading perspective this isolates the US Dollar as a currency backed by a hawkish regime that needs to lift rates to stem inflation. This makes carry trades in pairs like USD/JPY much more attractive, which explains the recent explosion in the pair as USD/JPY has climbed to fresh 20-year highs.
This is why we’ve been holding a bullish bias on the US Dollar from a technical stand point for almost a year now. And there is still scope for further gains, in my opinion. But – this is trading, so timing is always of concern, and even if bullish, just buying an overbought market and ‘hoping’ that it’ll all turn out alright isn’t really a strategy.
I looked into this in-depth in yesterday’s webinar, highlighting a few areas of interest for higher-low support in USD pullback themes.
Well, since then the pullback has started and we’ve already started to test one of the first of those levels at 100.27. It’s so far held a bounce but sellers are taking another swing and it doesn’t look as though it’ll hold for much longer. I’m also tracking deeper support at the 100.00 level on DXY, followed by 99.77 and then the area of prior resistance from the March range, plotted at 99.34-99.41.
US Dollar Hourly Price Chart
EUR/USD The Reason
So, one of the big reasons that I was looking for pullback in the USD yesterday is because of the setup in EUR/USD.
And like my bullish long-term stance in USD I’m bearish long-term in EUR/USD. But, again, timing: The pair jumped down to a major zone of support after the ECB rate decision last week, in a very impulsive move – and then stalled. And for Monday and Tuesday of this week bears couldn’t break any new ground, merely holding at that spot of support in a very vulnerable manner.
And then this morning prices began to lift, highlighting how forceful deduction can be in trading setups. If bears wanted lower prices they had ample opportunity over the past two days and they didn’t seize the day. So, the look now is on pullbacks running up to a spot of potentially lower-high resistance for long-term bearish trends.
For that, I’m following a spot at 1.0930 and another at the 1.1000 psychological level.
EUR/USD Four-Hour Price Chart
I looked into GBP/USD yesterday, as well, highlighting setups on both sides of the pair. Both are based on support around the 1.3000 big figure that doesn’t look ready to give way just yet, somewhat similar to the above scenario in EUR/USD albeit with less long-term impact.
But, this pullback in the USD has allowed for GBP/USD to lift and it’s now testing my first level of resistance at 1.3057. There’s another a bit higher, around 1.3108 and that’s confluent with the bearish trendline for today.
GBP/USD Four-Hour Price Chart
AUD/USD has been my pick for short-USD setups for almost a couple of months now but that may be shifting, although that theme is still developing.
From February into early-April AUD/USD remained on a strong trajectory, eventually topping the .7650 figure after previously threatening to break-below the .7000 spot in early-Feb. The concern at this point would be how price has sliced through a number of nearby supports. And, from the four-hour chart, it’s looking like we have a pullback in a potentially new bearish trend.
The .7500 level could be a key item to follow here, looking for sellers to offer some liquidity inside of that big figure should the pullback in the recent short-side move continue.
AUD/USD Four-Hour Price Chart
USD/JPY Pullback Begins
I looked into this one yesterday as USD/JPY had just continued to breakout while running towards the 130.00 level.
As I had shared there’s really just one of two ways to handle such a situation: Either chase prices higher and hope that the trend keeps running. Or, try to be patient, plot some support and look for the pullback. As I wrote then I’m in the latter camp as I’d much rather miss out on a setup than lose capital by chasing a sub-optimal one.
And now that the pullback is here the search for support begins. The first level I had looked at yesterday was at 126.55, which hasn’t come into play yet. And below that is a significant amount of prior structure to work with from 124.15 up to 125.86.
USD/JPY Four-Hour Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX