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US Dollar Technical Forecast: Bullish
The US Dollar just closed out a massive week. And, to be sure there’s been quite a few of those lately for the Greenback. As the Fed has started to shift into a more-hawkish position counter-parts haven’t kept up, and this has exposed the US Dollar to a continuation of strength that’s now been going on for close to a year. Of recent, however, that theme has shifted into another gear as the FOMC is talking up the possibility of numerous rate hikes this year.
When we heard from the bank in March at their first 25 bps hike of this cycle, they highlighted the possibility of another five or six hikes this year. Markets, as of this writing, are looking for another nine, which is fairly stretched from any other recent occurrence out of the FOMC. But, given where inflation is at, it looks like the Fed is going to have to move towards some extreme moves to get price stability back into control.
The impact of this has been pretty clearly positive for the US Dollar, negative for stocks and negative for bonds. And at this point there’s little reason to think that it’s over or that anything is close to change, and this is why the Quarterly Forecast for the US Dollar was held at bullish again this quarter. And, this weekly forecast that will similarly remain the same as last week showed a very strong technical factor that alludes to the potential for further gains.
The US Dollar Finally Pulled Back
I had written about this on Tuesday afternoon, just before the pullback started. And the logic for that expectation was largely just one of technical positioning. The US Dollar had run up to a long-term spot of resistance and, at the same time, major pairs of USD/JPY and EUR/USD and even GBP/USD were dealing with their own long-term spots of relevance.
That US Dollar pullback was fast and, as it turned out, short-lived as it lasted less than two days before bulls jumped back on the bid and drove the DXY back-above 100. That strength drove through the Thursday close and through most of the day on Friday to produce yet another fresh yearly high.
The weekly bar in the USD is very bullish, with an underside tail reflecting the pullback that was soundly bid higher. Prices are nearing a possible resistance zone from around 101.42 up to a Fibonacci retracement at 101.80. This is the same zone that had started to come into play two years ago when Covid was getting priced-in.
US Dollar Weekly Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD
On the basis of that expectation for a pullback in USD last week was the setup in EUR/USD, which saw the pair push down to a major spot of support that sellers didn’t yet show a willingness to test through. That led to a minor pullback as prices scaled back up to the 1.0931 level that I was looking at, and once that price traded sellers came rushing back into the equation and prices have re-engaged with the 1.0800 figure.
Next week marks the end of April and if we do see prices remain below this long-term trendline, it would be the first monthly close below this trendline in the pair. And that can help to keep the door on the short side of the pair. Deeper support exists around the Covid low, around 1.0630 and beyond that around 1.0593.
EUR/USD Monthly Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
GBP/USD Breaks
Of major pairs from last week it was the breakdown in GBP/USD that was most forceful.
I had looked into this backdrop in the Tuesday webinar as there was a case on either side of the setup, with a possible falling wedge or a descending triangle, depending on how it was being drawn. But, I also highlighted in that webinar how to follow the development of each, and as the week went on it became clear that the descending triangle was in-play as prices bent but didn’t break at the 1.3000 psychological level. The break there finally happened on Friday morning as the pair plunged to a fresh yearly low.
This one could be more difficult to chase given the 200 pip move on Friday but, logically there should be some pullback at some point from short-cover, and that could re-open the door for lower-high resistance.
The 1.3000 spot is an obvious one to track for support-turned-resistance but there may be another spot at around 1.2950. If bears remain aggressive they may not even allow for a re-test of the 1.3000 area and that 1.2950 level could be relevant in that scenario.
GBP/USD Daily Price Chart
Chart prepared by James Stanley; GBPUSD on Tradingview
AUD/USD Bears are Back
Even the commodity currencies were unable to withstand the force of USD gains. AUD/USD was a pair I was tracking on the long side since early-February, and even when the USD was breaking out, Aussie strength held and AUD/USD continued to jump. That’s been shifting over the past few weeks but last week, particularly Thursday and Friday, were a massive shift to that pattern.
I started to look at a bearish shift in the pair in that Wednesday article regarding the US Dollar.
And now it looks like bears are back in AUD/USD, but chasing could be of challenge considering how aggressively that Friday bar came off. The look here is for support to hold around the .7250 psychological level, which could allow for pullback to .7314 or perhaps even .7367, which could then re-open the door for bearish near-term strategies.
Bigger picture in AUD/USD, it’s the .7000 big figure that sticks out like a beacon. This price bent but didn’t break in February, and the next test may not be treated so friendly.
AUD/USD Daily Price Chart
Chart prepared by James Stanley; AUDUSD on Tradingview
USD/JPY
USD/JPY set a record this week by gaining for 13 consecutive trading days. That streak finally hit its end on Wednesday with the USD pullback, and USD/JPY tested the 127.50 psychological level. And, frankly, that pullback could’ve run deeper given the magnitude of the initial move.
This can be a difficult one to work with as it’ll likely be vulnerable to headlines and hints that the BoJ may, at some point, step in; and I think this is why we’ve seen a pause point just ahead of the 130.00 psychological level. As I wrote earlier in the week there were already some grumblings on that front and while nothing has been formalized yet, that point likely isn’t far away if we breach that big figure.
I remain bullish in the pair but I remain cautious around breakout strategies here given how stretched the move is. Instead, support potential remains around the bullish trendline in the pair or, perhaps a little deeper, around a spot such as 126.55 or, perhaps even as deep as 125 or 125.86 if a pullback can really get in order.
USD/JPY Four-Hour Price Chart
Chart prepared by James Stanley; USDJPY on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
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