US Dollar Price Action Setups: USD/JPY Breakdown, EUR/USD Breakout

US Dollar Talking Points:

• Coming into this week there was a one-in-three chance for a rate hike at the Fed, which sounded peculiar to me as many were calling for bullish breakouts in the USD.
• As looked at in the webinar on Tuesday, it was the USD/JPY backdrop that mattered most and the pair reversed aggressively as allegations of US and Japanese coordination drove prices lower.

Market hopes for a rate hike from the Fed were dashed but it’s the response to that which is defining the week, at this point.

The initial pullback in USD/JPY was bid as buyers jumped in at the support I looked at in the post-Fed article. But then on Thursday night, right around the European open, selling began to show in USD/JPY. That move looks like it was intervention from Japan and reports circulating on Thursday appeared to echo that. But perhaps the larger move was in the pair around the cash equity open as USD/JPY slid aggressively around 9:30 AM and that led to circulating rumors that the New York Fed performed another ‘rate check,’ calling member banks like what happened back in January.

While the NY Fed has access to rates the act of actual calling banks can be seen as a possible precursor to an intervention. And that (allegedly) was ramped up on Friday morning as the circulating rumor was that the New York Fed was calling banks to warn that there might be action later in the day. This brought another wave of weakness as the bounce in USD/JPY was eviscerated, and the pair returned back-below the 160.00 level.

For next week this is the big theme, whether we see more profit taking and risk aversion from longs as it seems as though both sides of the pair have interested parties trying to talk the price lower.

In USD/JPY, it’s the 155 area that’s of interest for a deeper pullback or sell-off, as this was the resistance that showed after the breakout from the Takaichi election last year.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD

Despite the chaotic second half of the week the DXY basket held well with the levels looked at on Tuesday. With a couple hours until the weekly close price is testing below the 100-level in DXY but the 100.36-100.44 zone came in as lower-high resistance, and for next week, that combined with 100.65 and 100.86-101 serve as resistance for bearish continuation scenarios.

US Dollar Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

The Euro is a whopping 57.6% of the DXY basket, but when we consider how long and built-in that carry trade is in USD/JPY, it makes sense as to why flows there could impact the larger major market of the Euro.

That was on display this week as EUR/USD broke out of a falling wedge around the Fed, and then ran up to above the 1.1500 level as USD broke down with the USD/JPY move.

For next week, 1.1500 is now a level for bulls to defend, with 1.1469 below that and then 1.1436.

EUR/USD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

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