US Dollar Talking Points:
- The breakout of the US Dollar occurred this morning, after which prices started to pull back following the publication of PCE data for the month of May.
- Today is the last day of Q2 and the door remains open for additional strength in Q3, as I shared in our Technical Forecast for Q3 in USD. To access our trading forecast, the link below will set it up.
- 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.
We are now in the last day of second quarter trading and it’s been a brutal exit for equities. The Nasdaq 100 is currently experiencing its second worst quarterly loss since 2000, eclipsed only in October 2008, which marked the bottom of the global financial meltdown. And there’s still a day left, so we could end up seeing the sellers push this to the biggest loss in a quarter.
But there is a relationship here: higher rates are helping to drive equities lower and this ties in with FX in the massive uptrend that is priced into the US Dollar over the past year. As inflation continues to rage, rate expectations continue to rise and stocks continue to fall. This theme looks set to continue into the third quarter, but this morning brought a very faint glimmer of hope to that. Core PCE printed inside expectations, coming in at 4.7% vs. 4.8% expected.
This helped bring some pullback to the US dollar which was breaking out this morning. The currency found support at the 103.82 level I highlighted on Tuesdayand at the time of this writing, prices remain above the psychological level of 105.00.
This pullback may have more to do with EUR/USD than the PCE print itself, although it is likely a combination of the two. But I will take a closer look at EUR/USD under our next chart.
Four-hour chart of the US dollar
Chart prepared by James Stanley; USD, DXY on Tradingview
EUR/USD approaches major support
The US dollar is trading at a new 19-year high. USD/JPY is at a new 24-year high. EUR/USD, so far, has not been able to break below its own 19-year low.
It’s close: this low is at 1.0340 and was set in 2017. In May, EUR/USD was down, but recovered just below this level at 1.0349. And again in June the pair was lower and a higher low developed, this time at 1.0359.
At this point, I started looking for a pullback in the move, but that was cut short as sellers came in at the same resistance that held the last two week highs at 1.0593.
The sellers are making another attempt at support and so far that attempt has failed. But that carries the potential for a third-quarter breakdown and the fundamental side is a major driver that doesn’t seem to be stopping any time soon.
At this point, the resistance potential remains at 1.0500 psychological level.
EUR/USD four-hour price chart
Chart prepared by James Stanley; EURUSD on Tradingview
GBP/USD decoder cut
I watched a formation of rectangles in GBP/USD on Tuesday, focusing on the level at 1.2159. This level broke yesterday and prices found support at the 1.2100 level. This bounce has since found resistance at the previous support level, leaving the door open for downtrend scenarios.
For longer-term support, the zone at the psychological level of 1.2000, going up to Fibonacci level at 1.2021 remains a key focal point.
GBP/USD four-hour price chart
Chart prepared by James Stanley; GBPUSD on Tradingview
USD/CAD enters the third quarter with attractive potential. There is a longer term double top formation with about 560 pips distance between the top and the neckline of the formation. If this fills and closes, it projects USD/CAD spot prices below the 1.2000 level. It can be hard to imagine this scenario happening, especially as early as Q3, but the technical formation is what it is and if it doesn’t fill, there is potential for a breakout at this price of 1, 3077 which has already rebuked the bulls twice in the second quarter.
For now, there appears to be downside potential here for those who would like to mitigate this USD strength, with prices holding below a resistance zone ranging from 1.2950 to 1.3000. The recent low printed the 38.2% Fibonacci retracement, so the next support could be sought in the area between the psychological level of 1.2750 and the Fibonacci level at 1.2740.
USD/CAD daily chart
Chart prepared by James Stanley; USDCAD on Tradingview
One of the strongest trends in the second quarter and first half of 2022 is currently in the pullback. USD/JPY hit a fresh 24-year high yesterday and markets are watching the Bank of Japan’s bond-buying activity closely, trying to watch for when the bank might start to change policy. Earlier in the week, Kuroda apparently kept the door open for yen weakness which helped print this new high. But, the lack of continuation after the summit indicates one of two things and probably a combination of both: either a) nervousness about a possible change in this bond buying policy, or b) a extreme overbought condition, and I’m not necessarily referring to RSI here.
According to the daily, it seems that there is still upside potential with prices remaining in a ascending triangle although this short-term support is currently being tested. Deeper swing support at 134.27 is essential for the bullish theme to remain as a breach below opens the door for a decline to the psychological level of 132.50.
USD/JPY daily 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