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

US Dollar Talking Points:

  • The The US dollar hit a new 20-year high yesterday with another high-level test of psychological level 105.
  • Today marks the start of two days FOMC meeting with tomorrow bringing the accompanying rate decision and press conference. Yesterday, a report from the Wall Street Journal made the rounds indicating that a 75 basis point hike could be expected tomorrow and that this had a noticeable impact on the markets, including the USD.
  • The analysis contained in the article is based on price action and graphic formations. For more on price action or chart patterns, see our DailyFX Training section.

This theme has certainly taken its time. It was at the end of last November when President Powell had proposed to remove the word “transitional” because it had become clear that inflation was not going to go away on its own. At the time, the most recent CPI print had come in at a whopping 6.8%, continuing the trend that was evident throughout the year. The Fed continually dismissed this as being related to supply chain disruptions, which were Covid-related; and despite the fact that the CPI rose above 5% in May, the bank still held out hope that things would correct themselves without the Fed needing to pull out the punch bowl.

But, as the end of Powell’s first term approached, the FOMC chief suddenly changed his mind on the matter and started talking about the need to fight inflation.

That was seven months ago, and at this point the Fed has hiked rates twice for a total of 75 basis points. Inflation at this point has shown little responsiveness as we just saw another 40 year print on the CPI last Friday.

On the currency front, there was another element of interest at the end of last week that continues to have some impact and that was European Central Bank rate decision. The ECB is facing a similar problem to the Fed last year, with inflation in the eurozone exceeding 8%. So in last week’s rate decision, it was expected that the ECB would start changing its stance to fight that inflation, to some degree, to avoid falling into the same position as the Fed lies this year. But the ECB didn’t really seem too hawkish, instead pointing to a 25bp hike in July that could be followed by a 50bp move in September; neither seems very likely to stop the inflation that is already playing out in the economy.

The response there has been significant. The Euro began to decline and the US Dollar surged, coming out of a formation of an ascending triangle this which I had spoken about just after the decision was taken on the tariffs.

This formation filled and buyers continued to pressure supply throughout Monday’s trade, helping the The greenback will set a new high in 20 years at yesterday’s meeting.

Two-hour price chart in US dollars

Chart prepared by James Stanley; USD, DXY on Tradingview

Longer Term US Dollar

Looking back on the daily chart, we can see the USD perched at this new high with only minimal pullback so far.

US Dollar Daily Price Chart

USD daily chart

Chart prepared by James Stanley; USD, DXY on Tradingview

EUR/USD

For traders planning for a continuation of the USD breakout, they are likely also looking for a continued EUR/USD breakout.

This ECB rate decision brought the bears on board as it became clear that the bank was not yet ready to shift into a more hawkish gear to fight inflation. And there are other risks as well, given the ongoing battle in Ukraine which still keeps some inflationary pressures in the equation, such as with wheat or energy.

There are already banks calling for parity since this morning, which has been a notorious trap in the past on the EUR/USD. But, given how quickly the bears have returned to the pair, the current 19-year low at 1.0340 looks exposed to potential for a breakout as we approach tomorrow’s FOMC rate decision.

Last week’s candle completed a evening star formation in the pair which is often followed for the purpose of bearish reversals. In this case, it would be a reversal of the short-term pullback chart that found resistance around the psychological level of 1.0750.

EUR/USD weekly price chart

eurusd weekly chart

Chart prepared by James Stanley; EURUSD on Tradingview

GBP/USD slices via key support

As I wrote before this CPI report last week, GBP/USD had an element of encouragement for the bulls in the fact that the price had held support for a few weeks prior. This support ranged from 1.2452 to 1.2500.

But as the USD surged following that inflation report, the GBP/USD pair dipped into that support zone, and at this point the pair is now trading at new two-year lows. , approaching a test of the psychological level of 1.2000, which is confluent with the 61.8% Fibonacci retracement of the big move 2020-2021.

At this point, price action is the proverbial falling knife. Trying to catch it could prove problematic. But, this confluent support zone a little lower on the chart may be enough to stem the wave of sellers, which could allow for a short-squeeze/pullback type scenario.

And, of note, there is a Bank of England rate decision on the economic calendar for Thursday, less than 24 hours after the Fed.

GBP/USD daily chart

gbpusd daily chart

Chart prepared by James Stanley; GBPUSD on Tradingview

AUD/USD

The RBA raised rates by 50 basis points early last week. But, a look at the weekly chart shows a market that is clearly bearish on the matter, as the past two weeks have produced a strong reversal of the gains of the previous three weeks.

This exposes the pair’s current yearly low at 0.6830, and it also threatens to invalidate a bull flag formation this set in on the longer term AUD/USD chart. A break of the low opens the door for a descent to the 61.8% retracement of the major 2020-2021 move.

AUD/USD weekly chart

AUDUSD Weekly Chart

Chart prepared by James Stanley; AUDUSD on Tradingview

USD/JPY

The Bank of Japan meets Thursday night/Friday morning in Asia, and the big question is the BoJ’s tolerance for all the yen weakness we’ve seen recently.

As I pointed out at the beginning of last week, BoJ Governor Kuroda had apparently opened the door to another round of yen weakness, saying the bank wanted to see “stable” inflation above 2%. At that time there was only one inflation print that got above that marker and that was the most recent month at 2.5% so the markets were really expecting that the BoJ remains cowardly and passive on the issue.

As a result, Yen weakness rebounded last week and USD/JPY climbed to another 20-year high. Eventually, the price reached the 135.00 level, which blocked the advance for now. In the daily chart below, we can see the tension visibly displayed as the past three daily candles highlight various forms of indecision.

USD/JPY daily price chart

USDJPY daily chart

Chart prepared by James Stanley; USDJPY on Tradingview

Short term USD/JPY

Moving down to a tighter time frame, we can see the construction of an ascending triangle formation against this resistance at 135.00.

This leaves the door open for the potential for an upside breakout as we approach the FOMC rate decision which is then followed by the BoJ on Thursday this week.

USD/JPY hourly price chart

USDJPY Hourly Chart

Chart prepared by James Stanley; USDJPY on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow james on Twitter: @JStanleyFX

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