USD Price Action Setups: USD/JPY, EUR/USD

USD Talking Points:

• While the Dollar sold off amidst a seemingly bullish backdrop in the prior week, it made up for it this week with a strong breakout after the Fed and BoJ rate hike announcements.
• USD/JPY remains the driver for global FX markets and it was the response to the BoJ rate hike that really made the week, including a stronger pullback in EUR/USD as the major pair sank below the psychological 1.1500 level.

It remains a USD/JPY world in the FX market as the crowded carry trade didn’t get that shock of concern that Scott Bessent had hinted at a couple of weeks ago. While the BoJ did hike rates, they didn’t catch anyone by surprise. And Kazuo Ueda refrained from any explicit timelines for future hikes which contrasts with a Fed that did forecast another hike by year-end, and on net, the USD/JPY pair put in a strong showing around FOMC and BoJ rate hike announcements. This helped to drive the USD up to a fresh seven-week high.

From the weekly chart, the USD remains in the same range that’s been in-place for more than a year now, with this week showing DXY pushing above the 100-level for the first time since the sell-off back in July.

That sell-off, of course, was driven by the dual intervention in the Japanese Yen, with both Japan and the U.S. jumping in to push the pair lower. That’s the big question for next week, whether we see another exogenous push of pressure in the crowded carry trade that still has yet to unwind.

US Dollar Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

This is still the center of the FX market, as far as I’m concerned, and the reaction to the BoJ meeting highlights that markets were looking for something more from Kazuo Ueda. But, in the US session so far we’ve seen that rally pare back, which highlights perhaps the bigger theme, which is holding this near or close to that 160.00 handle can be a daunting proposition.

From the longer-term, there’s a five-year trendline that’s so far helped to set support, and I think this remains notable until it gets taken out.

USD/JPY Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Shorter-Term

This is still a tough one to get too comfortable with on the long side given that recent history of intervention, but after a pullback, such as we’ve seen over the past two weeks, bulls have taken control and the rally had run by more than 500 pips at one point. As we go into the weekend some profit taking has taken over as price has pulled back from resistance at prior support – but this doesn’t yet appear to be a situation where longs have been shocked out of holding positions in the pair.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

At this point, despite the Euro being a much larger portion of the DXY basket than the Japanese Yen (57.6% v/s 13.6%), it very much feels like EUR/USD is just along for the ride. As a case in point, EUR/USD dropped dramatically over the past week. The weekly chart over the past year displays a choppy, mean-reverting state, and that’s what’s of interest for next week.

EUR/USD Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

With price stretching below the 1.1500 handle, the question for next week is one of mean-reversion and whether bulls can force a rally back-above the big figure. There’s a prior swing level at 1.1578 that stands out as the next significant spot above the psychological level.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

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