US Dollar Outlook: Don’t Write Off the USD Just Yet

Picking a reversal on any market can be a painful experience — especially if one simply jumps in on a whim or fails to manage risk properly. But most turning points are accompanied by a herd mentality that the current trend will persist. And when a reversal arrives, most are surprised.

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US Dollar Outlook: Don’t Write Off the USD Just Yet

Let’s take the US dollar as an example. The majority continue to write the USD off with fundamentally sound reasons, asset managers are their most bearish on the US dollar index since 2011, and traders are effectively short USD in aggregate near their most bearish levels since September. This alone does not guarantee a strong bullish reversal, but it certainly serves as a warning of one.

Moreover, price action on the USD Index and FX majors is sending clues of at least a near-term bounce. Whether it turns into a big bounce or a small one is likely in the hands of President Trump. Should trade deals be made, the dollar seems primed for a short-covering rally — and a deep correction in gold could follow. If trade talks drag on, perhaps only a minor technical bounce is on the cards.

US Dollar Index (USD) Technical Analysis

The daily chart shows the US dollar remains in a clear downtrend, consistently respecting trend resistance since February. Earlier this week, I outlined a head and shoulders top pattern, which projects a downside target just below 96. But let’s consider an alternative scenario.

A textbook head and shoulders top should have seen prices break aggressively lower following the right shoulder (RS) and a decisive break of the neckline around 98.67. Instead, bearish volatility was almost non-existent around that neckline — and price is now attempting to use the December low as a support level. Furthermore, a small bullish doji has also formed at the December low, alongside a bullish divergence on the daily RSI (2).

USD Index: 4-Hour Chart

Zooming into the 4-hour chart, we see a bullish pinbar accompanied by extremely high volume. Given the candle opened and closed around the same price despite a lower wick, it suggests there was significant buying pressure behind the bullish reversal. Notably, the candle also showed a high positive delta volume — meaning there were considerably more aggressive buyers than sellers. In other words, a ‘change of hands’ appears to have occurred, from bears to bulls.

Ultimately, I suspect at least a minor bounce is due. That doesn’t necessarily mean Thursday’s low (98.30) is the low, but any retracements towards it could offer counter-trend traders an opportunity to scale into the move with a wider stop — in hopes of catching a push higher towards ~99.40 (near the weekly VPOC and swing high). A break above that level brings the 100–100.44 zone into focus.

Forex Majors

Further price action clues of a potential USD reversal are littered across FX majors. Even if a reversal fails to materialise, the fact that all major FX pairs are pausing at or around key support and resistance levels at the very least suggests we’re at a critical juncture for the US dollar.

EUR/USD Technical Analysis: Euro vs US Dollar

A shooting star reversal has formed near the 2022 high (1.1450), just below the year-to-date (YTD) high at 1.1577. As the euro comprises around 58% of the US dollar index (DXY), a bearish reversal here would be pivotal for a broader USD recovery. Still, some 'bullish wriggle room' above Thursday’s high should be allowed, as traders may attempt another push towards the 1.16 handle.

GBP/USD Technical Analysis: British Pound vs US Dollar

The British pound hit a fresh YTD high on Thursday, but also printed a shooting star candle and closed back beneath the double-top pattern formed two weeks ago — a potential warning for GBP/USD bulls.

USD/CHF Technical Analysis: US Dollar vs Swiss Franc

Much like the US dollar index, USD/CHF appears to be hesitating around its neckline. While the textbook head and shoulders top implies further downside, bearish momentum has stalled — making the pattern questionable for now.

USD/CAD Technical Analysis: US Dollar vs Canadian Dollar

The Canadian dollar broke a key trendline this week, yet bearish follow-through remains weak. A small bullish hammer formed on Thursday, and with overall volatility declining, a potential falling wedge (bullish reversal pattern) could be forming on USD/CAD.

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The Japanese yen continues to hold above the 142 handle. Whether this is a head and shoulders top remains up for debate, but a confirmed break below 141.97 would strengthen the bearish case. That said, the fact that USD/JPY has held up while USD/CHF and the DXY have breached their necklines may hint at a degree of underlying USD strength.

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

Each time the Australian dollar breaks above 0.65 against the US dollar, a bearish reversal has followed. The daily chart now shows multiple shooting stars and bearish outside candles around this key level. The Australian dollar will need to make up its mind soon — surely AUD/USD can’t remain trapped between 0.64 and 0.65 forever.

NZD/USD Technical Analysis: New Zealand Dollar vs US Dollar

The New Zealand dollar still shows a more constructive bullish structure than the Australian dollar, making NZD/USD a preferred long if the US dollar enters its next leg lower. However, a shooting star has also formed on NZD/USD at key resistance, suggesting potential near-term hesitation.

Economic Events in Focus (AEST / GMT+10)

09:50: JPY Foreign Reserves (May) (USD/JPY, EUR/JPY, Nikkei 225)
11:30: AUD Building Approvals, Private House Approvals (Apr) (AUD/USD, ASX 200, AUD/JPY)
15:00: JPY Coincident Indicator, Leading Index (Apr) (USD/JPY, Nikkei 225)
16:00: GBP Halifax House Price Index (May) (GBP/USD, GBP/JPY, FTSE 100)
17:00: CHF Foreign Reserves (May) (USD/CHF, CHF/JPY, EUR/CHF)
18:30: EUR ECB President Lagarde Speaks (EUR/USD, EUR/GBP, EUR/JPY)
19:00: GBP Mortgage Rate (GBP/USD, GBP/JPY)
19:00: EUR Employment Data, GDP, Retail Sales (Q1/Apr) (EUR/USD, EUR/GBP, EUR/JPY, DAX)
22:30: USD Average Earnings, Payrolls, Jobless Rate, Participation Rate (May) (USD, Gold, S&P 500, Nasdaq 100, Dow Jones)
22:30: CAD Employment Report, Participation Rate (May) (USD/CAD, CAD/JPY, TSX)

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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