US Dollar, EUR/USD, GBP/USD, USD/JPY, USD/CAD Talking Points:
It’s been a digestion type of week for the US Dollar and while the currency did technically set a fresh yearly high, bulls weren’t able to retain much traction above 94.50 and prices invariably reverted back towards support. But, at this point, the levels are relatively clean and support and resistance are both rather clear. Resistance is holding at a Fibonacci level and support remains at the area of prior resistance, taken from the ascending triangle formation that had brewed ahead of the Q4 open.
For next week, the macro focus shifts away from the US with a heavy inflation tonality. Wednesday, in particular, should be busy as we get inflation reads out of the UK, Europe and Canada. This is followed by Japan with another inflation release on Thursday. In the US, earnings season is now underway and this will likely have some macro overtones. Next week brings some big names like IBM, Netflix, AT&T and American Express. The heavy focus here will be technology which accounts for about a quarter of the S&P 500, and there’s strong expectations for strong earnings growth there.
Also of interest for next week and likely something that will steal some attention: A potential Bitcoin ETF, which the SEC has recently remarked on and it looks like a formal announcement may be on the horizon. This will likely dominate financial media, if and when it does happen.
On the macro front – rates remain the driver. This was well illustrated this week in the Japanese Yen which continued to fall in a number of markets. Short Yen was my Q4 Top Trade, coupled up with the British Pound, largely for this very reason regarding rates dynamics.
In the US Dollar, the rates theme is likely going to remain the key driver. This week saw yields relax in the early part of the week only to jump again on Friday after a strong retail sales release. Accordingly, USD price action pulled back to hold support at prior resistance, taken from the ascending triangle that had previously set up.
At this point, traders have to consider the possibility of a deeper move on that support: We’ve only retraced 14.4% of the recent bullish move and a trip to the bottom portion of the zone (in green, below) would account for a 23.6% pullback while keeping that bullish trend alive. So there could be some continued scope for retracement, even with the bullish trend in the USD remaining alive and well.
US Dollar Daily Price Chart
EUR/USD Bounces from Oversold
Powering this breakout in the US Dollar was a firm sell-off in the DXY’s largest constituent of the Euro. EUR/USD pushed below 1.1600 as the USD was breaking out, and sellers continue to push as prices moved towards the key psychological level of 1.1500. But sellers started to get bashful around the big figure and this led to the build of a falling wedge, which will often be approached with the aim of bullish breakouts.
The logic is sound and often applies around a big support level: As that support is coming into view, especially if the market is oversold in any way, the market will make slight lower-lows while sellers remain vigilant at highs or around tests of resistance.
The breakout from the falling wedge has thus far been rather mild, with prices merely pushing back up to the same 1.1600 area that I was looking at for resistance this week. And while there’s been a struggle, neither side has made a decisive push. If the USD does continue to pullback into next week, look for prices in EUR/USD to move towards the 1.1664 level, after which a big zone of prior support comes into play as potential resistance, plotting from around 1.1709-1.1736.
EUR/USD Four-Hour Price Chart
GBP/USD Breaks Out Beyond a Big Spot
On Monday I highlighted an ascending triangle setup in GBP/USD. As noted above on the US Dollar’s similar formation coming into Q4, this formation is often approached with the aim of bullish breakouts and that’s precisely what’s happened so far this week in GBP/USD.
At this point, the pair is already up to that next resistance level, around the psychological price of 1.3750, and just beyond that is a bearish trendline that projects to around 1.3800 into early next week.
This may be a situation where, similar to the US Dollar, a pullback to support, taken from prior ascending triangle resistance, can keep the door open for bullish continuation scenarios in the pair.
GBP/USD Four-Hour Price Chart
USD/CAD For USD-Weakness Scenarios
I had looked into USD/CAD during last week’s mid-week webinar, highlighting how there may be some brewing potential for downside should the US Dollar begin to soften.
USD/CAD didn’t really even need all that much softness as the jump in oil prices helped to keep a strong bid behind the CAD, and USD/CAD has fallen through a number of supports along the way. I had looked into the matter yesterday, highlighting a couple of areas to follow for lower-high resistance potential.
For those that do want to look into the CAD-strength theme but are reticent to do so against the US Dollar, more amenable pastures may be elsewhere, meshing up a strong CAD with a potentially weak currency such as the Yen or the Euro.
USD/CAD Four-Hour Price Chart
USD/JPY Making Big Moves
As noted earlier, rates are the big driver and that’s pertinent to both the US Dollar and the Japanese Yen. I’ve had a few questions over Twitter as to why the Yen has been so impacted by this theme:
As rates are coming back to life, so is the potential for carry trades. With higher rates in the US as markets are anticipating a move from the Fed, there’s now more motive for holding long USD to capture that new, higher rollover rate. The Yen, on the other hand, is backed by a Bank of Japan that’s been sitting on negative rates since 2016, and there’s little expectation for that to change anytime soon.
So, simply, this is a rates dynamic, and as rates come back elsewhere, such as the US or perhaps the UK, this can create a greater attraction towards the long side of those currencies when meshed with a weaker currency such as the Yen. This was the genesis behind that Q4 Top Trade idea, a simple rates play.
That rate play has remained in full effect in USD/JPY and the pair has just pushed up to another fresh three year high this morning, crossing a major level of resistance around the 114.00 handle.
There is some resistance sitting ahead, and this spans from around the 114.74-115.00 area, with the former of those prices functioning as the current four-year high while the latter is a key psychological level.
USD/JPY Weekly Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX