US Dollar, USD, EUR/USD, GBP/USD, USD/CAD, USD/JPY Talking Points:
It was a wash week in the US Dollar as the currency is looking to finish the week very close to where it had started. It wasn’t a week without volatility, however, as the USD bounced on Tuesday and Wednesday only to give back almost the entirety of those gains on Thursday and Friday.
I had looked into the US Dollar during the Tuesday webinar, tracking a number of major pairs in the effort of devising strategy for the week. In this article, I’ll recap those setups while updating the analysis after a few days of performance have built-in.
US Dollar Head and Shoulders Pattern, Potential to Break Down
On Tuesday, I had shared that there weren’t many major FX pairs that looked attractive for USD-strength scenarios. The main outlier was EUR/USD and as a secondary option, there was also USD/CAD given adherence to long-term support. But the USD then spent much of the next 24 hours rallying into the release of FOMC meeting minutes on Wednesday, and that seemed to help stall the move around the 91.00 level on DXY, with sellers taking over on Thursday and pushing prices right back towards the 90.00 handle.
For next week, it’s going to be difficult to ignore the head and shoulders pattern that’s built on the USD chart, with focus around the neckline which holds just above the 90.00 level. Head and shoulders formations are often approached with the aim of bearish breakdowns, and considering where the neckline holds around the 90.00 psychological level, a breach-below could lead to a fast move thereafter.
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US Dollar Eight-Hour Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD Pulls Right Back to Big Resistance
On the Tuesday webinar I had remarked that EUR/USD was one of the more attractive setups for USD-strength, and that filled-in fairly well with a continued sell-off on Wednesday. At the source of that argument is a key zone of resistance that’s been in-play since early-December. This zone spans from 1.2134 up to 1.2167, each of which are 50% markers derived from longer-term Fibonacci studies.
When this zone re-emerged in short-term price action on Tuesday, it led to a hold with a bearish swing. But buyers stepped in before the 1.2000 level could come into play again, and this led into a higher-low as price action simply went right back to that resistance zone.
At this stage, a hold of resistance in the zone can keep the door open for bearish scenarios; but given how quickly buyers pushed prices back-up to resistance, there may soon be a topside break around-the-corner. Bears would rightfully be a bit more cautious of setting up off of this zone for next week; and there may even be some bullish breakout potential if buyers can finally push through this resistance area running from 1.2134-1.2167.
EUR/USD Four-Hour Price Chart
Chart prepared by James Stanley; EUR/USD on Tradingview
GBP/USD: Cable Crushes to Fresh Two-Year-High
The British Pound was a focus area on Tuesday, as I wrote a technical report earlier in the day before digging into the major pair on the webinar that afternoon.
The big theme in GBP as noted in both instances was the brute strength that the currency had displayed, making GBP/USD as one of the more attractive short-USD candidates. But, as I had shared in the technical report, given the performance of USD/JPY, GBP/JPY may have been even more accommodative for similar stances around Sterling strength, and sure enough that breakout has outpaced that of the major pair.
I’ll touch on the Yen a little later in this article, as there could be continuation potential particularly with a continued push of risk-on behavior. But for GBP/USD next week, there’s no signs yet of the bullish trend slowing down. The one matter of obfuscation would be price action trading above the psychological 1.4000 handle. Something like this may lead to a slowing of the bullish push, which could possibly allow for a pullback similar to what showed up on Wednesday of this week.
Should that scenario arise, there are a few different areas of possible support, each marked on the below chart in blue below.
GBP/USD Four-Hour Price Chart
Chart prepared by James Stanley; GBP/USD on Tradingview
USD/CAD Grasping to Long-Term Support
Similar to what I had said on Tuesday in which there weren’t many attractive options for USD strength outside of USD/CAD; well, that situation may be extending into next week.
The item of attraction with USD/CAD, particularly for USD-strength scenarios, is the fact that long-term support continues to help hold the lows. That support shows around the 1.2622 area on the chart which is the 50% retracement of the 2002-2007 major move in the pair.
This price re-entered the equation last month and helped to set support in the pair over a few different tests. And, longer-term, there’s a falling wedge formation that remains in-play and if bulls can push up for another test of resistance, the formation could be followed for a continued bullish breakout.
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There is a counter-side to this setup, however, involving a more recent formation that I’ll look at a little lower in this article.
USD/CAD Daily Price Chart
Chart prepared by James Stanley; USDCAD on Tradingview
USD/CAD Shorter-Term: Descending Triangle Shows Up
As longer-term price action in USD/CAD has been bouncing around inside of that falling wedge, another formation has formed, and this one actually points in the opposite direction. A recent show of horizontal support combined with lower-high resistance presents a descending triangle formation, which will often be approached with the aim of bearish breakdowns.
To learn more about the descending triangle formation, join us in Finance Prop Education
USD/CAD Four-Hour Price Chart
Chart prepared by James Stanley; USDCAD on Tradingview
USD/JPY Reversal Following Falling Wedge
Another pair that may harbor some attraction for themes of USD-strength is USD/JPY. Frankly, there’ve been few currencies that have been able to keep pace with USD-weakness and of recent the Japanese Yen has certainly been one, and its been like that for much of the New Year so far.
Price action in USD/JPY had built into a falling wedge coming into 2021. Buyers began to push the reversal in January, and that theme has continued so far through the first half of Q1.
To learn more about the falling wedge, check out Finance Prop Education
But – as I had remarked on Tuesday, this theme of Yen-weakness may be more exciting elsewhere, particularly for traders that are looking to actively avoid the US Dollar. Pairs like AUD/JPY and GBP/JPY could be attractive for strength scenarios, largely on the basis of the Yen being a more active counterpart than what’s been a messy US Dollar.
USD/JPY Daily Price Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
Yen Weakness for FX Strength Themes
Given the recent trajectory of USD/JPY, there may be continued utility in favoring Yen-weakness over USD-weakness in the coming week. Granted – the potential for a USD-breakdown is there, taken from the head and shoulders pattern combined with the litany of fundamental themes that appear to be pushing in that direction.
But – that’s just potential for now. Reality highlights the fact that the Yen already is in the midst of that trend weakness, and for traders looking at strength themes in a currency such as the British Pound or the Australian Dollar, there may be a more attractive avenue against the Yen than in the major pair.
I had looked into this in last week’s Analyst Pick on AUD/JPY, which has continued to break-out this week. And while both AUD/USD and AUD/JPY are pushing to fresh highs, that extra Yen-weakness, as highlighted by the USD/JPY chart above, has certainly helped to amplify the breakout in AUD/JPY.
AUD/JPY Breakout to Fresh Two-Year Highs
Chart prepared by James Stanley; AUD/JPY on Tradingview
— Written by James Stanley, Strategist for Finance Prop.com
Contact and follow James on Twitter: @JStanleyFX