USD/CAD 1.40, USD/JPY 155, Dollar Domination Continues to DXY Gap

USD/CAD, USD/JPY, US Dollar Talking Points:

• The US Dollar has pushed another fresh high this morning and now DXY is testing the 106.50 level.
• That level is a big spot as this is what marked the highs in April and May, setting up a double top formation that unwound over the next four months.
• There’s remaining unfilled gap up to 106.88, which came from an FOMC rate decision last November. Meanwhile there’s differing looks at USD through USD/CAD and USD/JPY which is explored further in the video below.

US Dollar Domination Continues

The post-election run in the US Dollar has continued up to a fresh five-month-high, and a massive spot of resistance potential is now in the picture. I had looked at this in depth in yesterday’s webinar and this morning’s CPI report helped to fuel the incline as EUR/USD has perched down to a fresh yearly low.

It was last November that the Fed had started to sound confident that the fight with inflation was over. The FOMC sounded quite dovish and it appeared as though they were convinced that rate hikes were finished and that the next move would be a rate cut. They laid the groundwork for that in their projections last December, but when this showed at the November 1^st press conference, DXY closed the day at 106.88 and then opened the next day at 106.50, leaving an open and exposed gap on the chart for the US Dollar.

That gap remains unfilled today and it was the bottom of that gap that set the high in April and May and, so far this morning.

US Dollar Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

US Dollar Two-Year Range Still Intact

From the weekly chart we can get a better view of the bigger-picture backdrop for the US Dollar and while there have certainly been some shorter-term trends to work with, such as the sell-off through this summer or the bullish trend earlier in the year, the currency has been range-bound for a couple years now. This goes along with a similar look in EUR/USD and that pair is nearing the 1.0500 level which put in a hold of support last year, with a boost in November as the DXY gap showed on the back of the FOMC rate decision.

The big question now is whether bulls are ready to fill the remaining unfilled gap and, if they can, would they be able to muster the additional strength to drive up to fresh highs.

In that scenario, USD/JPY seems situated attractively to take advantage of that strength. If not, USD/CAD could be of more interest for USD-weakness scenarios as the pair has pushed up to just under the 1.4000 level that bulls haven’t wanted to test through for the past four years.

US Dollar Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY

While US politics has certainly had some sway in USD price action of late, there’s also political dynamics at play in Japan and it seems as though the hawkishness that had started to price-in over the summer is very much in question. Perhaps more importantly for traders, USD/JPY price action has been bullish with a support hold at the 200-day moving average last week ahead of the election, which has been followed by a test and breakout of the 155.00 psychological level in the pair.

At this point, given the prior resistance reaction around 155, there would be a couple of spots for higher-low support potential. The zone running from prior swings of 155.22-155.38 would be attractive for bullish continuation scenarios and given a support reaction, it would also indicate an element of defense above 155.00. But even if that doesn’t hold the 155.00 level remains in-play for trend continuation scenarios.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

USD/CAD

While the US Dollar has shown a breakaway move on the DXY chart along with EUR/USD’s break down, USD/CAD has been a bit calmer on the matter, at least so far. The pair made a run at the 1.4000 handle earlier this morning, but buyers have so far been held at bay. And that’s a big price for the pair as it hasn’t traded since 2020 when the USD was being driven-higher by safe haven and risk aversion flows.

So far, bulls have remained persistent since the failed run at 1.4000 earlier today. So this may not yet be ready for reversal scenarios and given the USD pushing up to that unfilled gap, there may be another high left in store for USD/CAD.

The more interesting scenario, however, is a failed breakout at 1.4000, which can then open the door for pullback or reversion scenarios. This morning’s high was a mere eight pipettes shy of the 1.4000 handle so we can already see some impact from that price. For levels, there’s a short-term support at 1.3978 that’s so far held the pullback from that failed run at 1.4000, but below that is another spot that plots from 1.3968-1.3969 and if sellers can start to push below that, then there would be some evidence that they’re starting to take control on a shorter-term basis.

USD/CAD Hourly Price Chart

Chart prepared by James Stanley, USD/CAD on Tradingview

--- written by James Stanley, Senior Strategist