US Dollar to Range Resistance, EUR/USD to Support, USD/CAD 1.4000

US Dollar Talking Points:

• It’s been a brisk move in USD markets since last week’s election and this has coupled a strong bullish move in stocks, so far.
• For the US Dollar, there’s remaining unfilled gap from 106.50-106.88 which was produced by the FOMC rate decision last November. That represents a major spot ahead if USD bulls can continue to stretch the short-term move.
• EUR/USD has been range bound for most of the past two years, and price is now testing fresh 2024 lows. A bit lower, however, is a major spot around the 1.0500 handle that held support last year before driving a turn in the range.
• For USD-weakness, USD/CAD has lagged many other USD pairs in the recent run of strength, and this sets up a possible 1.4000 test. The more interesting scenario there is the possibility of capitulation from a failure from bulls to drive beyond that price.
• For USD-themes, inflation is back in the headlines with tomorrow’s US CPI print and Thursday’s release of PPI. So, while it’s difficult to imagine anything different than the brute force strength that’s shown since last week’s election, spoken to in the webinar as one of the ‘psychological variables,’ that data tomorrow could present opportunity for profit taking from DXY bulls.

It’s been a US-centric drive since last week’s election results, with both US equities and the US Dollar jumping in the aftermath of Trump’s win.

As I said the day after, I don’t expect that to continue as I’m looking for one market to diverge. I’m still of the expectation that on a longer-term basis that will be stocks continuing to trade higher with the US Dollar retaining the two-year range, which I’ll speak to in a moment.

For US equities, the FOMC rate decision a day later provided a possible stumbling block as the Fed suddenly started to sound not-so-dovish. At the rate cut in September the Fed had projected Fed Funds to be between 3.1 and 3.6% by the end of next year, and between 2.6% and 3.6% for 2026. That led to an aggressive expectation for cuts being priced in through the end of next year.

But at last week’s rate decision, the bank removed a key phrase from their statement announcing the rate cut, pertaining to having confidence that inflation was under control. Powell played down the importance of that during the press conference but in the week since, we’ve seen rate cut odds for next year moderate a bit. For updated FOMC projections, we have to wait until December and odds for a cut there have narrowed a bit from last week, currently at 55%, down from 77.3% a week ago.

 

Fed Expectations for December 2024

Data taken from CME Fedwatch

 

As rate cut odds have gotten priced-down or out to a degree, USD strength has continued and DXY is now trading above the 106.00 handle for the first time since May. But, at this stage DXY remains within the two-year range and there’s a massive spot sitting overhead.

It was the FOMC meeting on November 1^st of last year that the Fed started to sound very dovish, as if they were nearing a cut. The currency closed that day at 106.88 and then opened the next day at 106.50, which started a massive sell-off in the currency that ran into the end of last year.

To date, that gap remains unfilled from 106.50 up to 106.88 and that’s a major spot if bulls can continue to stretch the move in DXY. It was the bottom of that gap at 106.50 that set the high in April and May, brewing a double top formation that filled in shortly after.

 

US Dollar Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

US Dollar Longer-Term

 

A look at the weekly chart shows another couple of strong moves that have suddenly stalled and then reversed around the 106 level up to around 107. That’s what led to the quick reversal after the Q3 open when 106.00 held the highs, similar to the 106.50 reversal in April and May.

Last year’s bullish run in the USD was historic in nature, with 11 consecutive weeks of gain until, eventually, the USD shoed capitulation after a failure at the 107.00 handle.

Is this time different? It surely could be, but from a price action perspective there’s no evidence yet to suggest otherwise. As such, this can inform strategy in a few different ways on a couple different pairs, as looked at below.

Perhaps more interesting, as a thought exercise, speculate what it might take to allow that to happen? We’d likely need to see the Fed as less and less dovish and, perhaps even, as somewhat hawkish. The knock-on effect of that could be equity weakness which is something that it seems they would want to avoid, if possible.

 

US Dollar Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

EUR/USD

 

At the time of the webinar EUR/USD hadn’t quite perched down to a fresh 2024 low and in the hour or so since, it has, which highlights that continued stretch in the US Dollar.

But getting bearish while at support can be challenge, just as getting bullish near resistance can, and it was just a couple months ago that we had the counter-scenario in EUR/USD. At the time, the pair was stalling at the 1.1200 handle which was inside of last year’s high at 1.1275. And despite a weak USD, EUR/USD bulls were simply unable to continue trends beyond the big figure until, eventually, the pair started to turn at the Q4 open. With 1.0600 being traded through this morning that represents a 600-plus pip reversal in a little under a month-and-a-half, but this can be a challenging time to chase the pair lower.

At this point, the pair is still in the two-year range. It was the 1.0500 level that was vigorously defended last year and that’s the next logical spot of support in the pair. I’d equate that level to a test of the gap in DXY from 106.50-106.88.

 

EUR/USD Weekly Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

USD/CAD

 

So, the US Dollar is obviously quite strong and there’s no evidence of that being over yet. There is the possibility of range support playing in EUR/USD above, but if we do get that scenario, where DXY shows some resistance at the gap, the bigger question is whether the long side of EUR/USD is the most attractive venue to work with that theme.

I’m still of the mind that USD/CAD could be of more interest for USD-weakness scenarios, whether that’s a simple pullback or a larger reversal type of theme. But while the USD has had a strong bullish move and EUR/USD a decisive bearish move as that USD-strength has priced-in, USD/CAD has been far more tepid.

And that extends a failure to test above 1.4000 since it briefly traded above the big figure in the backdrop of the Covid pandemic back in 2020.

I’ve been tracking USD/CAD for USD-weakness over the past week and change and while DXY has continued to charge higher, USD/CAD hasn’t been able to show much for bullish breakouts, instead, posing attractive pullbacks during brief episodes of USD-weakness.

At this point, bulls have remained pretty persistent so, taking a step back to allow for a 1.4000 test seems a logical way to move forward. The more interesting scenario, in my opinion, is if bulls fail to drive topside trends on a test of 1.4000 which can start to expose the prospect of capitulation, just as I had looked for in EUR/USD in late-September with the 1.12000 level.

 

USD/CAD Weekly Price Chart

Chart prepared by James Stanley, USD/CAD on Tradingview

 

--- written by James Stanley, Senior Strategist