US Dollar Breakdown Drives Breakouts in EUR/USD, GBP/USD

US Dollar Talking Points:

• It was a very bearish week for the US Dollar as the currency extended its decline from the resistance test from the week before.
• DXY has now broken below key support at 100.80 and this has nullified a possible double bottom formation, while also filling in a descending triangle that was brewing for the first-half of the year. Such formations are often followed for bearish breakouts, so the big question now is whether sellers can continue the move and how aggressive they might be given the print of fresh yearly lows.
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It was a very bearish week for the US Dollar as the currency finally traded below the support that had held through a couple of pensive tests already in 2023 trade. That level plotted just below the 101 handle in DXY, and it helped to hold bounces in February and again in April.

The month of June was particularly strong for the Greenback and this gave the appearance that support at 101 had held the lows, keeping the door open for bulls to come back to the table. But, after two weeks of struggling with resistance at a bearish trendline, USD bears came back into the matter and drove DXY right back down to that support as we came into this week’s economic docket, where the Wednesday release of CPI was prominently featured.

That CPI report showed another drawdown in US inflation, with headline inflation moving down to 3% and this brought a strong push in stocks to go along with that bearish break in the US Dollar. The Greenback pushed below the 101 handle and continued to run as that descending triangle formation yielded to bearish breakdown. The trend continued to run through Thursday trade, with DXY pushing below with yet another key level at the 100 handle.

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

USD: Door is Open for Bears, What Can They Do With It?

We now have the fresh breakdown in the US Dollar with price breaching support in the descending triangle formation, and the double bottom formation that remained as a potential setup is now nullified, further putting the ball in bears’ courts.

The big question now is whether they can continue the move and how aggressive they will remain to be. Of course, there is the consideration of offset to keep in mind, as a continued bearish break in the USD will need to be matched by strength in other currencies, given the fact that DXY is a conglomeration of underlying currencies. So, in a related matter a relevant question is whether bulls can continue driving breakouts in EUR/USD and/or GBP/USD, to go along with the breakdown that showed this week in USD/JPY.

Given that prior support structure and the length of the grind in that area, there are a few different spots for lower-high resistance potential. The Dollar index is already testing one of those spots now at the 100 level and the next major spot would be around 100.80, which was the swing low from April. The 101 level just just above that, so this can create a zone of potential lower-high resistance and this is around where bears would ideally show up to illustrate trend continuation potential. If they fail to hold the highs there, the next resistance is around 101.53 and if that’s breached, questions would populate as to whether or not this breakout has legs.

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

EUR/USD

EUR/USD showed a massive breakout this week to go along with that breakdown theme in the DXY. This helped EUR/USD to set a fresh yearly high while driving above a zone of resistance that had held the highs twice so far in 2023 trade.

But, similar to the breakdown in USD, the big question now is whether bulls can continue the move into a fresh trend, and for that, we’ll probably need to see some evidence of higher-low support on pullbacks.

At this point resistance in EUR/USD has shown just inside of the 1.1250 psychological level, and the next major level of resistance from the weekly chart is around the 1.1500 handle. For support potential, that prior zone of resistance sticks out prominently, and there’s another level around 1.1186 that remains of interest.

If bulls can hold a higher-low at that price, without allowing for further pullback to the deeper zone of 1.1000-1.1100, that can be highlighting continued aggression from bulls, keeping the door open for topside continuation.

EUR/USD Weekly Price Chart

GBP/USD Explosive Breakout

On a similar tune, GBP/USD showed an explosive move this week to set another fresh yearly high. The prior week had completed a morning star formation, often tracked with the aim of bullish reversal and in this case, that was a reversal from the pullback move which led to strong bullish continuation.

This week saw the pair drive through the 1.3000 handle with only a brief pause at the major psychological level. This indicates extreme bullishness and this is something that could make chasing the trend a more daunting prospect considering how built-in that theme has become. This also alludes to support potential at that big figure of 1.3000, and if that can’t hold, deeper support potential appears around the prior swing-high of 1.2850, which had showed as resistance when the morning star formation had built.

GBP/USD Weekly Price Chart

USD/JPY Snap Back

It’s been a fast change in USD/JPY where just last week bulls were driving for another breakout with a continued hold around the 145 handle and now, a little more than a week later there’s concerns of an oversold backdrop.

What we have here is symptom of an overcrowded trade as pushed by the carry in the pair. With little sign of change from the Bank of Japan combined with the prospect of higher rates in the US kept the long side of the pair pushing to fresh highs through the Q3 open. As questions have populated around the US with the continued drawdown on inflation, that trend started to go the other way and this week it picked up significant speed, to illustrate the ‘up the stairs, down the elevator’ scenario that can be commonplace with crowded trades.

I published an article on the matter yesterday, asking where the low might be for USD/JPY. I highlighted a key level at 137.68, which was pertinent at the end of last year and over a few separate occasions so far this year.

That’s since come in to hold the lows but, it’s still quite early to suggest that this may turn into a reversal back into the bullish trend.

USD/JPY Weekly Chart

USD/JPY Breakdown Confirmation

At this point, the bounce from support has been rather mild in consideration of the larger sell-off. There was a morning star formation that printed around that support level, shown on the below chart which has helped to mark the low. This could potentially keep bulls in order to continue working the pullback but, similar to the above scenarios in all three markets, the big question is whether sellers jump back in on tests of lower-high resistance, thereby keeping the door open for bearish continuation scenarios.

The major level of interest here is around the 140.00 psychological level, which was quickly traded through earlier this week. That price spans up to 140.30 to create a zone and if sellers re-appear here, the door would remain open for a push down to another lower-low. But – if they falter, and instead move down to a higher-low, that case for pullback or potentially even reversal continues to gain a bit more allure.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

--- written by James Stanley, Senior Strategist