US dollar price action setups: EUR/USD, GBP/USD, USD/CAD, USD/JPY

US Dollar Talking Points:

• FX is panicking with major currencies like the British Pound reacting with concern.
• As I saw last week, there seems to be a disconnect between FX and bonds versus equities, which still hold onto supports even as panic is priced in in FX and bond markets. One side is probably “wrong”, but the question remains which one.
• The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns visit our DailyFX education Section.

The US dollar is at another new 20 year high and at this point the move is parabolic. This week’s open saw a collapse-like move in the British pound as Cable fell to a new all-time low. After the pair hit a low at 21:00 last night, the price rallied, but much of that rally has already been wiped out after the BoE issued a statement that failed to calm market participants.

But this is just the latest chapter in an ongoing drama that has seen Western world financial markets derail. That might sound like a grandiose statement when you look at stocks (or “Stonks” as the kids used to call them), but when you look at U.S. Treasuries, arguably the most important asset class on planet earth, or the foreign exchange market, the forms the basis of the world economy, it fits.

Just last week the 110.00 psychological level was resistance for the US Dollar. I had a look at this on Monday and showed another ascending triangle that kept the door open for bullish breakouts and that was at the 110 and 110.25 areas. This morning the USD surged as far as the 114.53 level for that new 20 year high. In between, of course, we had the FOMC rate decision, which still seems to be priced into the equation.

US dollar daily chart

USD: Overbought but still not stopping

I had spoken about this on Friday, but in the opposite direction, regarding oversold conditions on Cable. From the monthly chart we can see how significant this move was. And we can also see how much of an outlier this type of price action is. Normally something of this nature would induce the fading and look for a prize to settle down when cooler heads prevail.

And that’s part of the problem: Even with this extreme move, buyers still piled on. This raises the question as to whether we are on the cusp of collapse-like moves elsewhere as for now all roads are the long side of the US dollar and bulls are showing no signs of abating.

US dollar monthly price chart

Diagram created by JamesStanley; USD, DXY on trade view

EUR USD

Last week was very bad for the euro. EUR/USD started the week clinging to higher-low support, just around the 0.9950 area, but after a very poor performance on Tuesday, the pair’s longer-term support started to become vulnerable. I looked into this just before the Fed on Wednesday and after that rate announcement, EURUSD started spiraling lower and hit a new 19 year low.

At this point EUR/USD is attempting to hold support from a level I checked on Friday which is around 0.9594 which was a swing high that has become a swing low since 2002.

EUR/USD monthly chart

Diagram created by JamesStanley; EURUSD on trade view

This price was tested when GBP hit after this week’s open and similarly prices in EUR/USD rallied after the low was set at 21:00 ET. But, as with GBP/USD, the sellers have returned and are threatening another bearish leg of this move.

The recovery has since met a series of lower highs, revealing bearish break-down potential towards the 0.9550 level, which currently marks the 19-year low. And if that can be tested, the big number of 0.9500 is just below. If the sellers fail to continue the move, resistance may be sought around the 0.9700 psychological level.

EUR/USD 30 minute chart

Diagram created by JamesStanley; EURUSD on trade view

GBP/USD

Just last week GBP/USD dragged support around the 1.1414 level from the previous March 2020 lows. The pair has since completely unraveled, with sellers making a name for themselves by pushing prices down more than 1,000 pips from that previous point.

Today’s daily bar accounts for more than 5% of the GBP/USD quote and as of this writing there is a daily range of 535 pips. The wick on the downside combined with the reaction at the previous all-time low just above the 1.0500 level is usually something I would explore reversal strategies around, especially if accompanied by some sort of change or adjustment from the central bank.

And it looked like there might be what it takes this morning. And then the Bank of England issued a statement that was essentially no statement, and avoided getting involved in anything other than its next interest rate decision, which is nearly two months away. And GBP/USD went right back into the tank and now there is a chorus of calls for GBP/USD parity pressure.

So, from a directional perspective, this seems like a pretty tough time to align a trend. The big question is whether a rebound can materialize or if we see more collapse-like price action similar to the open last night. But even then, I’m a little wary of the timing. 8pm ET when the break really started to take shape is 1am London when liquidity is generally quite low. That sounds to me like someone trying to be George Soros 2.0.

For bearish moves, pressure below 1.0600 will darken the sky but a break below 1.0500 will reopen the door for a run down to the 1.0350 lows.

GBP/USD hourly chart

Diagram created by JamesStanley; GBPUSD on trade view

USD/CAD

I had covered the Canadian dollar in our technical forecast this week and maintained a bearish view on the currency as there was a major breakout in USDCAD last week.

And it was only two weeks ago that there was still some bearish potential as the price stayed below the 50% level of the Fibonacci retracement that encompassed the big move of 2020-2021. There was also a bullish channel that I was following as a bear flag and it all cleared last week.

There were two main factors at work here, one of which is evident as USD’s dull strength is exerting a lot of pressure. But falling oil prices are also playing a role, which has led to a major USD/CAD breakout.

At this point, everything on the long side will feel like chasing the movement. So there really are a few possible approaches to this: either apply breakout logic to prints of new highs, or alternatively try to be patient and wait for a pullback.

Now, if we stay in this panic-prone market environment, the breakout is likely to remain just as attractive. But if we see the world pull away from the edge a bit, the USDCAD high-low support may become attractive. There are a few possible points for this such as the 1.3652 Fibonacci level or longer term the 1.3338 area or maybe even the previous resistance move plotted around 1.3225.

USD/CAD weekly chart

Diagram created by JamesStanley; USDJPY on trade view

USD/JPY: It’s cat and mouse now

The Bank of Japan intervened last week on orders from the Japanese Ministry of Finance. Perhaps shockingly, this came shortly after a BoJ interest rate decision in which Kuroda told us not to expect any changes to forward the 2-3 year forecast.

USD/JPY celebrated the announcement by breaking above 145 for the first time in 24 years. But that didn’t last long as just ahead of Thursday morning’s euro opening, the Treasury Department ordered the BoJ to intervene in the FX market.

The BoJ used FX reserves to sell the US dollar and buy the Japanese yen. This pushed the USD/JPY lower towards the 140.00 level, albeit briefly. And the bulls have since reclaimed the move, with prices now very close to the same 145.00 level that was in play last week.

USD/JPY four hour chart

Diagram created by JamesStanley; USDJPY on trade view

USD/JPY: Power vs. Nature

At this point, the carry for USD/JPY is still positive. So there is an incentive for traders to investigate such matters and stand on the long side. And with the BoJ keeping rates low and in negative territory and the US continuing to climb, that stimulus is only growing.

This intervention, which we saw last week, has already largely faded out of the market. So the FX reserves that Japan threw at the problem are essentially burned and the net effect is that FX traders got entry at lower prices.

To solve the problem, Japan would appear to have to adjust interest rates, but that brings with it a lot of additional risk given the six years of extreme accommodation that has become Japanese monetary policy.

The big question now is how aggressively markets are willing to test this theory and how Japanese policy makers will respond in turn. Prices are already near the 145.00 level which last week seemed to be the nudge for the Treasury.

Historically, this remains a relevant area as Japan had a series of interventions in 1998 and USD/JPY was in the 145.00 area at the time.

Monthly USD/JPY rate chart

Diagram created by JamesStanley; USDJPY on trade view

— Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX education

Contact and follow James on Twitter: @JStanleyFX