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

US Dollar Talking Points:

• The US Dollar has continued to sell-off after last week’s CPI report. This has followed a similar pattern as last year. I had highlighted this ahead of the CPI report last week.
• At the time of the webinar the US Dollar had begun to bounce, and EUR/USD had shown pullback from a key zone of resistance. The big question around the USD right now is USD/JPY and whether a larger episode of carry unwind takes place.
• 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 has taken a beating over the past week. While the trend was strong and aggressive through September trade, stall began to show in October with a slight tinge towards bearish pressure as there was a show of lower lows. But it was the November open that really seemed to pull USD sellers into the mix after the FOMC rate decision on the first day of the month.

Last week’s CPI report was a major push point in that bearish theme for the Greenback, and that move had continued with another drive from bears on Friday and then Monday of this week.

This resembles what happened last year. I talked about this in the webinar last week after the CPI release and I had published an article on that topic the day before, highlighting those similarities.

But now that the analog has played out to a degree, it’s time to start pulling it apart, and trying to identify differences that may soon open the door to other ideas.

One of the major differences from last year and this year are rate expectations elsewhere. The DXY contract is a composite with a 57.6% weighting in the Euro. So, if the US Dollar is going to breakdown as it did last year, it’s probably going to need at least some help from the Euro. And the Japanese Yen is of interest here, as well, as that’s 13.6% of the DXY quote… but I’ll get to that in a moment.

Last year’s breakout in EUR/USD that pushed the reversal theme was also showing as there were expectations for more rate hikes out of Europe. So, the technical theme was very much backed by fundamental expectations, for the US to slow rate hikes as Europe picked up the pace. But can the same be said for this year? Both central banks are expected to be close to done with rate hikes, if not finished already.

In the US Dollar, the daily bar is currently showing a hammer formation, which is often approached with the aim of bullish reversal. This puts the focus on tests of resistance, and for that I’m tracking levels at 104.03, 104.38 and then a major zone from 104.70-105.00. And for support, the 103.50 remains a major level as this was the yearly open as well as 50% of the recent bullish trend.

US Dollar Daily Price Chart (indicative)

EUR/USD: Overbought and at Resistance

It seemed like just a few weeks ago that EUR/USD bulls were disinterested holding on tests of highs. This led to a choppy counter-trend channel in October, again, very similar to last year. The breakout here hit aggressively and the RSI indicator has already moved into overbought territory on the daily chart. That, of course, does not preclude further gains, but it does highlight just how quickly this countertrend move has priced in. And perhaps more to the point, it begs the question if the fundamental backdrop is as conducive to strength as it was last year.

The pair began test of a key zone of resistance today, spanning from Fibonacci levels at 1.0943 and 1.0960. I had highlighted this in the weekend US Dollar Price Action Setups article. It came into the picture on Monday and helped to bring a pullback on Tuesday.

The big question now is how much control bulls will continue to show as we’ve essentially had a pullback from a fresh higher-high. There’s support potential around 1.0895 and then at the 1.0835-1.0862 zone. If buyers can’t hold the lows above those areas, the prospect of deeper reversal will begin to look more prominent, and this would set up a test at the confluent area around 1.0750-1.0766.

And notably, RSI has already ventured into overbought territory about six weeks after it had left oversold conditions. This highlights a move that’s priced in very quickly.

EUR/USD Daily Price Chart

USD/JPY

This is the USD market that I’m most interested in at the moment.

The analog from last year has some similarities here, as well. BoJ intervention last October helped to keep bulls below the 150.00 handle – but what ultimately pushed that reversal was the CPI release on November 10^th last year. As a deeper USD reversal was building in, USD/JPY quickly unwound as carry trades bailed for fear of getting caught long in a very bearish trend. It only took three months to wipe away 50% of the move that took 21 months to build.

We’ve seen a pretty clear shift in USD/JPY since last Tuesday. But, a notable difference is the way that weakness priced in. Last year the CPI report on November 10^th triggered a massive move that ran for 762 pips over a two-day period.

The more recent episode has been slower – and more moderate as we’ve seen a maximum of 456 pips taken out from last Tuesday’s high.

Today is showing a really strong response to a support level at 147.37. This highlights that there’s still some attraction towards the positive carry theme and again, this highlights a difference from last year when bears went on near-immediate attack after CPI and, this year, have been showing a bit more caution and prudence.

From the four-hour chart below, we can see that bounce from 147.37 building. This sets the stage for a resistance test at 148.85 and if that doesn’t hold the highs, the 150 level could be back in the picture after that.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

Gold

Gold prices have put in a massive move, as well, driving from a 1932 support test last Monday to test above the $2k psychological level again.

I had shared my opinion in the webinar, that I do think a sustainable break above the $2k handle can be possible – but I’m unsure of whether that scenario is here, right now. I think this happens after the Fed pivots and while much of the market seems convinced that the Fed is done with hikes, that doesn’t necessarily mean that we’re close to cuts, either.

Gold structure is bullish as given the recent drive of higher-highs and higher-lows. This keeps focus on support levels at 1993, 1985 and 1980. If those get traded through, there’s 1975 and 1969 to contend with.

Gold Four-Hour Price Chart

Chart prepared by James Stanley, Gold on Tradingview

--- written by James Stanley, Senior Strategist