US Dollar Technical Analysis: USD Turn Gathers Steam

US Dollar Talking Points:

• Matters were looking bleak for the USD in early-April, but as noted in the US Dollar Technical Analysis article later in the month, the currency was starting to show tendencies of trying to turn the tide.
• The Greenback is now working on its third consecutive weekly gain. Markets are now warming to the idea that the Fed may have to continue hiking and this can keep the door open for bullish USD scenarios.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

The US Dollar is putting in another strong showing on the weekly chart, which would mark its third consecutive weekly gain. Last week’s weekly bar showed a bit of indecision after a resistance test at the 103.45 level, which had previously set support in December. But this week saw buyers take-over and that level showed up as support on Wednesday before another ramp up to a fresh two-month-high.

At this point, evidence continues to stack up that we may have already seen the bottom in the currency. I had investigated the matter in late-April, highlighting a hold at a key spot on the chart, which kept the door open for a double bottom formation.

That double bottom remains in-play, but for the formation to trigger bulls are going to need to test above the neckline of the formation, which I’m plotting at the 105.88 level. For now, resistance is showing from a bearish trendline produced by connecting late-November and March swing highs. That trendline has come into play on Friday trade, ahead of a long weekend, and despite an intra-day test above bulls don’t appear to be making much ground. This does, however, highlight pullback potential in the bullish trend, which I’ll look at in more depth after the next chart.

US Dollar - DXY Weekly Price Chart (indicative only, not available on Forex.com platforms)

From the daily chart of the USD, that bullish trend has been remarkably clean and tight on the way up as price has largely remained inside of a bullish channel for much of the past two weeks. This highlights a clear directional move that drove all the way until that resistance trendline came into play.

The current daily bar has a few hours before completion but at this point it’s showing as a doji and that’s following four consecutive bullish daily bars from this week, with significant strength on Wednesday and Thursday. The Monday doji at 103.00 remains notable, as well, as that marked the bottom of a morning star pattern that led to brute-force continuation on Wednesday and Thursday.

This keeps the door open for support at a few different spots of interest. The 103.82 level is of note, as this was the 2017 swing-high in the DXY. Below that, 103.62 remains of note as this was the prior weekly high that came back as resistance on Tuesday and, as yet, that price hasn’t been tested for higher-low support. Below that, 103.45 remains of interest, and the 103.00 level is below that.

The spot of support at 103.00 was support last Friday and again this Monday, so if sellers are able to breach that – questions of bullish trend potential could begin to populate.

US Dollar - DXY Daily Price Chart (indicative only, not available on Forex.com platforms)

EUR/USD Participation

When looking at big-picture scenarios in the US Dollar it can be worthwhile to also investigate the Euro, as the single currency is a whopping 57.6% of the DXY quote. While correlations do not always hold, it’s worth considering the dynamics of each market, especially considering that a part of the EUR/USD quote is the US Dollar. Going along with that support bounce in the DXY has been a rigid resistance run in EUR/USD, after the pair spent four weeks grinding at a key zone on the chart.

At this point, there could be short-term oversold concerns, which can keep the door open for pullbacks in the pair. Given how fast the pair has come off of that resistance though, the pullback could run up to as high as 1.0943, which is a Fibonacci level that had offered support multiple times before the breakdown but, as yet, hasn’t shown much for lower-high resistance.

As a case in point for that oversold argument, EUR/USD hasn’t re-tested the bearish trendline that marked the lower highs before the breakdown, since the pair actually broke down. And shorter-term, there’s been the build of a falling wedge, which is often approached with aim of bullish reversals.

Given the short-term nature of the formation, however, that could be a pullback in the longer-term trend, highlighting resistance levels at 1.0787, 1.0845, 1.0900 and then the 1.0943 level. If bulls are able to force a break back-above the 1.1000 handle, that could present invalidation scenarios.

EUR/USD Four-Hour Price Chart

US Dollar Shorter-Term

At this point, that US Dollar bullish trend is well pronounced and there’s indication that the move may be a bit overbought at the moment. From the four-hour chart, we can see continued RSI coming off of overbought territory yet again. And while I would hesitate to use an indicator for anything more than reference, there is a recent item of note here as RSI has begun to show divergence.

The Thursday high in DXY produced an RSI read over 80. But the push up to a fresh high on Friday led to a lower-high in RSI on the four-hour chart. That’s RSI divergence and while not a glaring red bearish sign, it is indication that this bullish trend has been well-priced over the past week, particularly the quick revisit to trendline resistance on Friday.

For resistance sitting overhead, the 105.00 level remains of note, after which the 105.88 level comes into the picture. For support, the 103.82 level is nearby, followed by 103.62, 103.45 and then 103.00.

US Dollar - DXY Four-Hour Price Chart (indicative only, not available on Forex.com platforms)

--- written by James Stanley, Senior Strategist