EUR/USD Tanks, USD/JPY Steps Up to Resistance as USD-Oil Rally Continues

The week opened with a bang as oil prices gapped up and quickly ran above the 100-level in WTI. But that breakout didn’t last, serving as a cautionary tale for those chasing weekly open gaps. As we close down the week, however, it hasn’t been all for sellers, either, as the weekly bar is currently showing as a long-legged doji with a couple of hours until completion.

From long-term charts, this is the kind of thing that can lead to mean reversion drives, and this can bear relevance to FX markets as there’s been a build in the correlation between the USD and oil prices.

WTI Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

US Dollar

I looked at the USD-oil correlation earlier in the week and that’s continued to take hold, with the daily chart below showing a current correlation of 0.89 between crude oil prices and the USD. I still think this is more of a coincidental factor, however, as it’s the constituents in the USD basket that have gotten hit hard by higher oil prices and, in-turn, lifted the USD along with it.

With that said, I do think there’s gap risk here, as well, given how aggressively bulls have piled into the move, as DXY is holding very near a yearly high as we wind into the weekly close. An initial run of profit taking around the Core PCE report this morning was followed by a continuation response from buyers, showing little trepidation in taking on long exposure into the weekend and this is why I think we could be looking at higher-than-normal gap risk for the next weekly open.

US Dollar Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

We have a mirror image situation going on here…

While EUR/USD broke out aggressively above the 1.2000 level back in January, I warned during that webinar to be careful of chasing when RSI was that overbought while testing above a psychological level. What then started as a pullback turned into a stark reversal.

Now, less than two months later, we have RSI just as oversold (or perhaps a bit more) and price is testing below a major psychological level. Again, making for a challenging backdrop to chase the move.

With that said, we’re not the only ones seeing matters from that perspective so the fact that bears laid into the move on Friday morning, holding a short-term higher-low ten pips inside of that obvious level at 1.1500 says something important. And this is why I think we could be looking at gap risk, on one side or the other, as we go into next week.

While there’s a lot of excitement here, I prefer structure, and if looking to sell, just as I was looking at on the other side back in January, I want to see a pullback and show of structure to allow for strategy.

For resistance, I’m tracking 1.1500-1.1507, 1.1578 and then 1.1654 in EUR/USD.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

USD/JPY is at a fresh yearly high and the obvious level is just a bit higher. If we’re going to see a significant gap down or reversal in the USD next week I think it will need to come from here, and based on the backdrop, I think that would probably need some help from either the Finance Ministry or Bank of Japan or perhaps even the US Treasury Department.

That said, I don’t think that intervention will or has to necessarily set a top – as it can be a stop run forcing a pullback until buyers come in at some level of support.

From the four hour, chart structure is still bullish with the resistance-turned-support at 158.88 followed by 157.97, 156.76 and then 155.54.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro