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

US Dollar Talking Points:

• The US Dollar has been driven-lower since the Q3 open and last week saw DXY finish with an oversold RSI reading on the weekly chart. That’s the first time for such an occurrence since early-2018 trade.
• Correspondingly EUR/USD remains in overbought territory on the daily chart but in my opinion a big portion of the USD push is coming from USD/JPY. With the Powell Proclamation of a Pivot at Jackson Hole on Friday, there’s even less reason for carry traders to be optimistic on bullish continuation themes in the pair.
• I’ll be looking into these setups in the Tuesday webinar and you’re welcome to join, click here for registration information.

US Dollar Goes Oversold

There’s been a lot of bearish USD drivers over the past five years, particularly since Covid came into the equation. But at no point over that span of time has the weekly DXY chart finished in oversold territory – until last week. The last time that happened was back in January of 2018, right around the time that DXY was setting a major low that hasn’t been taken-out since.

As I shared in the video – this doesn’t spell direct reversal scenarios as RSI isn’t a great timing indicator – it’s lagging and entirely based on past prices. But it is important context that highlights just how one-sided the move has been of late.

Also to open this week, DXY set a fresh yearly low by pushing just past the swing-low from last December that plots at 100.62.

US Dollar Weekly Price Chart

US Dollar Shorter-Term

The currency remains oversold on the daily chart, as well, which happened last Monday as sellers continued to push through the rest of the week.

Powell highlighting oncoming rate cuts at Jackson Hole during his speech on Friday served to extend the sell-off. But, if we look at this from a perspective of DXY constituency, the largest component of the DXY basket is the Euro, at 57.6%. It’s not as if there’s rate hikes expected from the ECB, yet EUR/USD has pushed deeply into overbought territory.

I think the push-point here remains USD/JPY with continued carry unwind. With rate cuts nearing in the US the attractiveness on the long side of the carry trade in the pair hasn’t been this low since the Fed started hiking rates in March of 2022. I’ll dig deeper into this topic in the USD/JPY section below. For now, in DXY, the big question is how sellers react on tests of resistance levels that could come-in as lower-highs.

We’ve already seen the first of those prior support levels in-play in early-week trade, plotted at 100.92. The reaction to that, so far, has held a short-term higher-low at 100.76. Above that, I’m tracking a swing of resistance-turned-support at 101.27 and then another spot at 101.60. Above that, the 102-102.16 zone lurks overhead.

US Dollar Four-Hour Chart

EUR/USD

It’s been an intense month of August so far for EUR/USD. In mid-July, the EUR/USD pair held resistance at a key spot of 1.0943; but the pullback from that found a low on the first day of August and bulls have been pushing hard ever since.

As I had looked at last week, RSI on the daily pushed up to the 75 level which is somewhat rare. The last time this happened in EUR/USD was back in December of 2020. The day after that RSI reading, EUR/USD pulled back in an aggressive fashion, finding support at the 1.1100 price which served as a springboard for bulls on Friday.

At this point the pair remains overbought although there’s a building case of RSI divergence. And from a fundamental vantage point, there’s not much to be excited about in Europe as the ECB is likely going to be cutting rates alongside the Fed. This makes the pair a reversal candidate in the not-too-distant future, although there’s no sign yet that bears are ready to take control of the pair.

If we do see bulls continue to push in early-trade this week, the level of attraction is 1.1275. This was the high in 2023 but it’s also the 61.8% Fibonacci retracement of the 2021-2022 major move, which is related to the 1.0943 level that held the highs in July as well as March; and it’s also related to the 38.2% retracement at 1.0611 which has, so far, held the lows in 2024 trade.

For supports, I’m tracking a short-term level at 1.1140 and then the 1.1100 level that held the lows last week. Breaking below those prices would exhibit a greater push from sellers.

EUR/USD Weekly Price Chart

USD/JPY

I looked into this one last week as price was posing a breakdown of the 145.00 level on Wednesday. As I had warned then, despite the seemingly bearish fundamental backdrop, chasing was dangerous. And instead of chasing the breakout lower, I looked to lower-high resistance levels, with the 146.08-146.44 zone remain important.

That zone then had two resistance test in the remainder of the week, with the final one showing just ahead of Powell’s speech. As USD-weakness heated up, the pair dropped down to a fresh low and this time put in a closed body break of the 145 level from the four-hour chart.

At this point, 145.00 is now lower-high resistance potential with the 146.08-146.43 zone remaining of interest, as we’ve seen only the top of that zone holding as resistance thus far; a hold at 146.08 would keep the door open with a lower-high.

USD/JPY Four-Hour Price Chart

USD/JPY Bigger Picture: A Theme within a Theme

The fundamental case on the long side of USD/JPY remains pretty unattractive, in my opinion. While the BoJ might not be hiking rates anytime soon, it doesn’t seem as though we’ll be seeing any rate hikes out of the US, either. And with Powell’s proclamation on Friday, the Fed is closer to a rate cut than at any point in the past four years.

If we look at the longer-term move in USD/JPY, the pair remains well-above those levels, with price still above the 38.2% retracement of the trend produced by the carry trade. On the below weekly chart, I’ve highlighted two other carry unwind scenarios and in both cases, the rage divergence between the US and Japan remained at high levels. The difference this time is that the Fed is nearing cuts and for carry traders that have loaded up on the pair, there’s a growing case of concern as a one-sided trade could see a continued rush for the exits.

USD/JPY Weekly Chart

USD/JPY Daily

As I shared in the video last week, a bearish fundamental backdrop doesn’t have to automatically equate to lower prices. The conduit between fundamentals and price action is trader sentiment and positioning and the sell-off from the July high has been fast and intense. Early-August produced a 38.2% bounce of that move with resistance holding at a confluent spot, and this is something I consider as an open door for longer-term bulls to take profits.

But just as we saw in carry unwind scenarios in 2022 and 2023 (the red boxes on the above chart), traders aren’t usually willing to wait around and if a crowded carry trade is seeing fundamentals flip in the other direction, there could be even more motivation for carry traders to bail on the trade, leading to more supply and lower prices.

At this point from the daily chart, that 145.00 level remains of interest for short-term resistance and a hold there would be an aggressive show from sellers. The 146 zone is just above that, but there’s even a case for such at the 148 Fibonacci level, as well.

USD/JPY Daily Price Chart

 Chart prepared by James Stanley, USD/JPY on Tradingview

--- written by James Stanley, Senior Strategist