EUR/USD Defends 1.0500 After USD, DXY Finishes FOMC Gap

 

 

US Dollar, EUR/USD Talking Points:

• The US Dollar breakout continued for a seventh week, and it’s been a stark contrast to the weakness that drove during Q3 trade.
• DXY is now near range resistance and the big item from this week was closing the gap from last November’s FOMC rate decision, right around when the Fed had started to sound as though rate hikes were over and rate cuts would be their next move.
• With EUR/USD at range support and the US Dollar at range resistance, the two-year mean reversion theme is center-stage for next week.
• I’ll be looking at both DXY and EUR/USD in the weekly webinar on Tuesday, and you’re welcome to join: Click here for registration information.

US Dollar bulls have made a statement so far in Q4 and we’re just half-way through the quarter. While weakness was pervasive in the first two months of Q3 trade following a test of the 106.00 handle, matters have shifted quickly so far in Q4 as the Fed has started to sound less and less dovish.

Perhaps paradoxically, the USD didn’t show much for bearish continuation after the Fed’s first rate cut. The bank had telegraphed the move quite well and expectations were already high for additional easing through the next couple of years. In the Fed’s forecast for the September cut of 50 bps, they had also highlighted the expectation for Fed Funds to be down around 3.1%-3.6% at the end of 2025, and from around 2.6%-3.6% at the end of 2026.

Nonetheless, sellers couldn’t break much fresh ground after that announcement and that led to the build of a falling wedge formation, often approached with aim of bullish reversal. And that’s precisely what’s shown so far in the 4^th quarter as buyers have pushed DXY up to a fresh yearly high.

The gap from last November was the big item for this week and as we near the weekly close, that’s been the only thing that’s been able to stall the breakout. It was last November when the Fed started to sound as though they were finished with hikes; and on the rate decision on November 1^st, DXY closed at 106.88 and then opened the next day at 106.50.

The gap was in-play in April and May as the bottom of that zone at 106.50 helped to set the high on two separate occasions, making for a double top formation. That slowed the move on Wednesday of this week, but buyers were undeterred, pushing for another fresh high on Thursday which amounted to a fresh yearly high in DXY.

Notably, the daily chart of DXY has started to show RSI divergence, with a lower-high on RSI and a higher-high on price. This is the mirror image of the RSI divergence that had shown in September, leading into the build of the falling wedge formation.

 

US Dollar Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

US Dollar Weekly Chart

 

From the weekly chart we can see the broader backdrop in the USD, which has been a range for the past two years. There have been some strong trends that stalled in this same area, such as the rally last summer that ran for 11 weeks before sellers stepped in. And then there was the rally in the first few months of the year, which stalled at that 106.50 level.

 

US Dollar Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

 

Now the big question is whether USD bulls have the motivation to continue the break and if we look at it from a fundamental perspective, that can be argued, as the FOMC is now signaling caution around future rate cuts. But, perhaps more important is the fact that DXY is a composite of underlying currencies and the largest component of that, the Euro, is in an economy backed by the possibility of more rate cuts down-the-road. Similarly, EUR/USD is testing range support which I’ll look at in a moment.

In DXY, the current two-year high populates at 107.35, and inside of that the 107.00 handle was in-play twice this week, including as a lower-high on Thursday after the comments from Jerome Powell brought question to the December rate cut that’s long been priced-in to markets.

 

US Dollar Hourly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

EUR/USD: From Range Resistance to Range Support

 

EUR/USD made a fast move up to the 1.1200 handle in August, and that’s where bulls suddenly started to show signs of stall. I had talked about this quite a bit in these articles and videos related to those articles, but that big figure was a tough spot for bulls to breach.

Now that we’re half-way through Q4 the pair has already pushed down to range support at the 1.0500 handle, which was last in-play a year ago as buyers showed up to hold the lows.

EUR/USD Weekly Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

EUR/USD

 

At this point the 1.0500 level has held the low and interestingly, that has some relationship with the DXY test of 107.00 looked at above. But, also of interest is the fact that there’s now a case of diverging RSI on the daily chart and RSI is pushing back above the 30-level.

This sets the stage for lower-high resistance tests at the 1.0611-1.0643 zone, after which 1.0700 and 1.0750-1.0765 would be of interest.

 

EUR/USD Daily Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

 

--- written by James Stanley, Senior Strategist