Dollar Dominance at Risk? EUR/USD Surges, USD/JPY Teeters on Hawkish BoJ

• US Dollar Index (DXY) signals potential top with a bearish evening star pattern
• EUR/USD breaks out of a falling wedge, testing resistance at 1.0460
• USD/JPY nears critical uptrend after BoJ hawkish hike
• Fed and ECB meetings likely to provide few surprises next week

Summary

Sands may shifting under the US Dollar Index (DXY), with a bearish evening star pattern aligning with weakening momentum signals. EUR/USD has broken higher from a falling wedge, while USD/JPY is fliting with a critical uptrend following the BoJ's hawkish hike on Friday. With Fed and ECB surprises unlikely next week, near-term price action in and around key technical levels could shape medium-term moves. Dollar dominance is wobbling—watch for confirmation!

DXY Dominance Over?

Unless we see a significant rally into Friday’s close, the US Dollar Index (DXY) weekly chart suggests the cycle high may already be in. The current three-candle pattern resembles a textbook evening star, often seen at turning points. An opposite morning star signal in early December proved accurate, as did the evening star in late June last year.

Source: TradingView

This latest signal is notable, especially as it coincides with a break in the uptrend that followed Trump’s election win. Adding to the bearish case, the RSI (14) uptrend from September has been broken, and while not yet confirmed by MACD, it too appears to be in the early stage of rolling over.

Traders should watch for a potential break of support at 107.75, a level DXY has bounced off in three of the past four weeks. If that level gives way, downside targets include 106.736 and 105.44.

Although not technical, it’s worth noting the market has trimmed expectations for Fed easing this year, dropping from six cuts to fewer than two since September. This shift leaves the dollar vulnerable given so much bullish sentiment towards the US economy is already priced in.

Source: TradingView

One look at the weekly charts suggests near term price action could prove influential for medium to longer-term moves in both pairs, particularly with the diminishing threat of an escalating trade war. Softer tariff rhetoric from Donald Trump this week, particularly towards China, underscores this shift.

Adding pressure on the dollar, the Bank of Japan offered hawkish inflation forecasts earlier Friday, raising overnight rates by 25bps and signalling more hikes to come. Combined, the dollar’s dominance since the US election looks increasingly vulnerable.

EUR/USD Risks Skewing Higher

Source: TradingView

EUR/USD broke the falling wedge it had been trading in with conviction earlier this week, with the price now testing horizontal resistance at 1.0460. With RSI (14) breaking its uptrend on the weeklies, and MACD starting to flick up towards the signal line, momentum may be in the early stages of shifting bullish, improving the prospects for an extended run higher.

If the price were to break and hold above 1.0460, those contemplating bullish setups could look to establish longs above with a stop beneath for protection. Potential targets include 1.0600, 1.0666 and 1.0762, depending on your risk appetite.

As noted earlier this week, major surprises from the Federal Reserve or European Central Bank at their upcoming meetings seem unlikely.

USD/JPY Unwinds on Hawkish BoJ

Source: TradingView

USD/JPY is also nearing a critical level after the Bank of Japan’s January rate decision, hovering just above the uptrend that began when the Federal Reserve started cutting interest rates. While not yet broken, RSI (14) has already broken its uptrend, and MACD is curling lower, suggesting momentum—like price—is starting to roll over.

If the uptrend is broken, shorts could be established beneath with a stop above for protection. On the downside, levels to watch include 153.30,  the 50-week moving average, and key horizontal support at 151.95.

If USD/JPY is unable to break the uptrend, the setup could be flipped with longs initiated above with stops beneath for protection. 158.76 is one target for those contemplating bullish setups to consider.

-- Written by David Scutt

Follow David on Twitter @scutty

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