US dollar price action setups: EUR/USD, GBP/USD, USD/CAD, USD/JPY

US Dollar Talking Points:

• The US Dollar is battling back with a sequence of higher-highs and lows that have built through February trade.
• Along with that theme of a stronger USD is higher rates out of the US, particularly on the longer-end of the curve as the 10-year note has seen yield rise to a fresh three-month-high. Relevant to that, we’ll see FOMC minutes on Wednesday, GDP on Thursday and Core PCE and Consumer Sentiment on Friday.
• Price Action webinars are back in action starting March 7th- to sign up, register here. 

The US dollar’s bullish trend was aggressive through much of last year, helped along by aggressive selloffs in both the Euro and British Pound. The USD finally started to find resistance towards the end of Q3, right around the collapse-like move in the British Pound. As the GBP recovered in Q4, alongside a bounce in EUR/USD and a pullback in USD/JPY, the US Dollar began a bearish move that continued into February trade.

Since the February open, however, USD bulls have started to take a stand. US treasury yields are continuing to rise on the back of higher rate expectations around the Fed, driven by increasingly positive US economic data that’s remained resilient in the face of last year’s brisk pace of rate hikes. This sets the stage for the March rate decision at the FOMC which is scheduled for a month from now, with markets strongly expecting another 25-basis point hike.

The bigger question is what happens after that and how many more hikes the Fed may have in store for 2023. This is where all the talk of ‘terminal rate’ comes from as markets try to anticipate just how hawkish the Fed might continue to be. And because March is a quarterly rate decision at the Fed, we’re also getting updated forecasts and projections so this will be a major focal point of that meeting. And leading into that rate decision, much as we saw last Thursday after the comments from James Bullard, Fed-speak will continue to take a massive toll on risk tolerance.

EUR/USD

The Euro is 57.6% of the composition of DXY so the US Dollar is heavily driven by performance in the single currency. And the big picture themes largely line up, with a strong sell-off driving through the first nine months of last year’s trade, followed by an aggressive pullback that ran from October into February.

The bullish move in EUR/USD was already starting to look beleaguered as we opened into 2023 trade, and price even put in a support test at the 1.0500 level, which is confluent between the psychological level and the 50% mark of last year’s February-September sell-off. But a bad piece of US data released in the first week of the year stalled that bearish move and gave another shot-in-the-arm to the bullish trend.

At this point, resistance in EUR/USD has held at the 76.4% Fibonacci retracement of that major move. Price had built into a rising wedge formation going into that resistance test, and such formations are often tracked with the aim of bearish reversals. Last week saw sellers set a fresh monthly low, with a bounce developing from a prior point of resistance at 1.0615. This sets the stage for pullback potential in the bearish move, with resistance potential plotted around the 1.0750 psychological level, which is confluent with the 1.0747 Fibonacci level.

EUR/USD Daily Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

GBP/USD

Cable was a touch less bullish coming into February than what was looked at in EUR/USD above. While EUR/USD stretched up to that fresh high in early-February, GBP/USD was holding resistance at the same spot that held the highs in December. This makes for a possible double top formation with a neckline a little more than 600 pips from the top.

That neckline is right around a key Fibonacci level, as taken from the 38.2% retracement of the 2021-2022 major move.

Sellers were making a fast push for a re-test there last week but ended up falling short, with prices unable to hold below the 1.2000 psychological level. This has built another formation with a shorter-term falling wedge, which is often approached with the aim of bullish reversals.

So, how does a trader reconcile between conflicting formations? The double top is potentially bearish (if the neckline is broken) while the falling wedge is usually approached with a bullish aim. In this case, both formations can be used together as the falling wedge can lead to a short-term bullish move, allowing for a lower-high to print below the 1.2447 high. And if that happens, the double top remains as a possible setup to work with. But if that top is taken out the double top is nullified, and the focus then shifts to a test of the 1.2500 psychological level.

GBP/USD Daily Price Chart

AUD/USD

AUD/USD may currently be one of the more attractive areas for USD bears. The pair found resistance at a key spot in early-February trade, right around the same 61.8% Fibonacci retracement that held the high in August of last year. This plots at .7131, just above the .7000 big figure that’s historically had pull on short-term price action in the pair. That price helped to show resistance last week, just before price went down for a re-test of support at prior resistance, taken from the 50% marker of the 2018-2020 major move.

This keeps the door open for bulls as this is an element of support taken from prior resistance; but that support needs to hold for this to remain the case and this plots from around the .6800 handle up to the Fibonacci level of .6823.

AUD/USD Weekly Price Chart

Chart prepared by James Stanley, AUD/USD on Tradingview

USD/JPY

USD/JPY remains a hot button as this has been a feast or famine pair on USD themes of late. During the massive bullish run in the Dollar through 2021 and the first nine months of 2022, USD/JPY was a big player. That USD-strength was matched with JPY-weakness and at times, that was an extreme showing on both sides of the pair. As US rates continued to rise, carry trades drove more and more strength into the pair until, eventually, USD/JPY was trading at fresh 24-year highs above the 150.00 level.

The Bank of Japan appeared unmoved by this theme for much of last year and with a leadership change expected atop the Bank of Japan for this April, markets had started to price in the expectation for some form of change in monetary policy. More recently, Yen-bears have shown up as Kazuo Ueda was appointed to the post, largely seen as being aligned with outgoing BoJ governor Haruhiko Kuroda.

The bullish trend that took 21 months to build saw 50% wiped away in just three short months, with support showing up at the 50% retracement of that major move. That level is at 127.21 and this currently marks the eight-month-low in the pair.

USD/JPY Weekly Chart

On a shorter-term basis, USD/JPY has been putting together a bullish move over the past month with another higher-high printing this morning after a test above the 135 psychological level. There’s higher-low support potential around the 133.09 Fibonacci level as this is the 38.2% retracement from the same study that helped to mark the low at the 50% marker in January.

This can set USD/JPY as one of the more attractive major pairing for USD bulls, given the fact that February printed a higher-low above the January low, and buyers have continued to press another near-term high in the early portion of this week’s trade.

USD/JPY Daily Price Chart

--- written by James Stanley, Senior Strategist

Follow James on Twitter @JStanleyFX