U.S. Dollar Breakout Post-CPI: EUR/USD, USD/JPY, GBP/USD, USD/CAD

U.S. Dollar Talking Points:

• Headline CPI beat and Core CPI came in below expectations on a YoY basis which led to an initial move of USD-weakness, until a big spot of support came into play at a key Fibonacci level which buyers then launched a strong bullish breakout in the USD.
• EUR/USD has prodded a deeper pullback and USD/JPY has broken out to fresh three-month highs. The oversold conditions on the USD that showed on both the daily and weekly chart coming into Q3 have now eased but the question is one of bullish continuation in DXY, explored further below.
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The initial response to this morning’s CPI print wasn’t positive for USD bulls; but what happened after sure was. The CPI print itself was kind of a choose your own adventure story. While both core and headline did increase from last month, headline CPI beat the expected while Core CPI came in beneath expectations. The initial response was one of weakness in the Greenback, but that only lasted for about five minutes – until a Fibonacci level of note came into play to mark the lows at 97.94 at 8:35 AM ET.

After that – buyers staged a strong move that led to a higher-high and a higher-low, and that move continued as the USD broke above a rising wedge formation, opening the door for a larger breakout in DXY.

Notably – the support from this morning is the same that was in-play back in April, and which had started to show as resistance late last week. Bulls have chewed through that while setting the stage for short-term themes of strength since setting a fresh low on the first day of Q3 trade.

U.S. Dollar Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

U.S. Dollar Daily

At this point the USD has clawed back a little more than 14.4% of the sell-off from the first half of the year, so the bullish move is still in the very early stages. As shown in the webinar, this opens the door for some higher-low supports as taken from prior resistance on shorter time frames. From the daily below, this highlights follow-through resistance at 99.39, which was a swing-high from June, or 99.63 which is the 23.6% retracement of the first-half sell-off.

A key decision point for the currency is the 102.00 handle, which came into play to hold a lower-high back in May, leading to the fresh three-year low that printed on the first day of Q3. But that price is now confluent with the 38.2% Fibonacci retracement of the first-half sell-off and that becomes a significant point of interest for bigger picture themes in the pair, creating a resistance zone from 101.65-102.00.

U.S. Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Breakdown

EUR/USD is breaking below a rising wedge formation to go along with the USD breakout above the falling wedge formation looked at above. The pair has continued to show inflections at Fibonacci levels of 1.1748 and 1.1686, with the latter level having come in as resistance this morning after showing as support for practically every day last week.

For the USD recovery theme to continue to play, it’ll likely require some continued help from EUR/USD. There’s now lower-high resistance potential at 1.1632 and 1.1663, with follow-through supports at 1.1543 and then the 1.1500 psychological level.

EUR/USD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

I’ve been talking a lot about USD/JPY of late as the Q3 open has ushered in a new behavior for the pair. While the USD set a fresh three-year low on day one of Q3, USD/JPY did not – instead holding at a higher-low with respect to the 142.50 level that set support in May and June.

And as USD-strength has come back, USD/JPY has stretched a strong breakout, with this morning bringing on fresh three-month highs in the pair. I wrote about USD/JPY in yesterday’s article highlighting the impact that CPI has had on the pair over the past couple of years and today is yet another example of that. At this point, there’s now support potential at prior resistance, as shown in the video above, with emphasis on the 148.08-148.13 area; and there’s also Yen-weakness potential in pairs like EUR/JPY and GBP/JPY.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

GBP/USD

Given the run of USD-strength that we’re seeing after CPI, it’s difficult to find many attractive backdrops for weakness in DXY. One possible area as a support test is currently taking place is GBP/USD. The support in question is the same that was in-play a few weeks ago, helping to set a swing-low in the back-half of June. It runs from the same 78.6% Fibonacci retracement that caught the highs last year down to a swing low at 1.3395. Bulls would need to come in quickly to retain this area as a usable spot of support, but in the webinar I went through a bit of scenario plotting to highlight how that could happen.

GBP/USD Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD

USD/CAD is another pair that I think remains of interest for broader USD-weakness setups, if Dollar bears are able to re-take control of the matter anytime soon. But for right now USD/CAD appears to be headed higher with a re-test of the 1.3750 zone that was in-play a few different times in May and June, first as support and then as resistance. There’s more resistance above that – so if the USD pullback does stretch, this can remain as a viable option for USD-weakness to show through future thematic USD moves. The 1.4000 level is an obvious candidate but before that, there’s a prior swing of resistance turned support at 1.3889-1.3905 and overhead, a major zone from 1.4151-1.4178. Notably that deeper zone was resistance-turned-support but since the 1.4000 break back around ‘Liberation Day,’ it hasn’t been back in-play since.

USD/CAD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist