US Dollar Price Action Setups: EUR/USD, GBP/USD, AUD/USD, USD/JPY

US Dollar Talking Points:

• It’s been another bearish outlay in the USD over the past week but notably, sellers haven’t been able to show much run at fresh lows.
• The likely culprit behind that is DXY’s largest constituent of the Euro showing a similar failure to drive at tests of resistance. For USD-weakness, both GBP/USD and AUD/USD could continue to hold more attraction as each pair has set fresh yearly highs in the latter-portion of the week.

The US Dollar set another fresh yearly low this week but, as we saw around the FOMC rate decision, sellers showed disinterest in the driving a continued trend. There was a bit of motive in the more recent instance, however, as year-over-year Core PCE showed its first increase in over a year, coming in at 2.7% against last month’s 2.6% read. And further to that point, that data point has been showing signs of stall this year, as the January release was 2.9% and then the past three months were at 2.6%. This speaks to the risk the Fed had previously highlighted around ‘inflation entrenchment’ and it’s presenting a different picture than what’s shown in headline CPI.

But, perhaps more importantly when looking at the US Dollar is the matter of counter-parts, as its largest constituent of the Euro at 57.6% isn’t exactly on significantly stronger footing, with the European Central Bank also in a rate cutting cycle.

U.S. Core PCE YoY Since January of 2020

Chart prepared by James Stanley

US Dollar

In the DXY, there’s been a continued show of trepidation from sellers. Last week’s 50 bp rate cut announcement pushed a fresh low but suddenly sellers started drying up, and prices quickly pulled back. And then earlier this week, sellers once again took another swing on Tuesday, coming one pip from testing the yearly low before another bounce had shown, with resistance ultimately holding at the 100.92 level looked at that day.

And then this morning, ahead of Core PCE, USD/JPY was quickly reversing after results of Japanese elections came-in and, once again, sellers showed little interest in continuing the trend even with the open door of fresh yearly lows.

US Dollar Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Resistance

One primary culprit of that continued failure to drive fresh lows has been the DXY’s largest constituent of the Euro.

EUR/USD showed a strong trend in Q3 even as the European Central Bank remained in a dovish position, and European data wasn’t necessarily all that much more attractive. I’ve shared my theories as to why I think that’s happening but perhaps more to the point is what’s been showing lately, and that’s a failure from bulls to drive topside trends even with tests of fresh highs.

The 1.1200 level that set the highs in August remains of issue, and this was what I looked at yesterday. That has since come in to hold the highs again and at this point, that could constitute a lower-high below the 1.1214 that showed on Wednesday at the longer-term Fibonacci level.

This isn’t to say that bulls are out of the conversation because there’s still an ascending triangle in-play on the below chart. But, there may still be more attractive venues for USD-weakness elsewhere, such as GBP/USD and/or AUD/USD. And for those that are looking for bounce setups or scenarios in the USD, this one stands out as the case can still be made that EUR/USD is within the confines of the same range that’s been in-play for the past 21 months.

For next week, the big level for bulls to defend appears around the 1.1100-1.1110 zone that was support earlier in the week.

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

GBP/USD

While EUR/USD is still well inside of last year’s high, GBP/USD has broken out to a fresh two-year high and continues to show more attraction for USD-weakness scenarios. Resistance for this week showed at the 78.6% retracement of the 2021-2022 major move and as illustration of that greater strength, EUR/USD’s high last year was at the 61.8% mark of the major move spanning the same period.

There was a pullback in GBP/USD this week but it didn’t last for long, and price reverted back to resistance around the prior highs.

Also, of interest for comparison, GBP/USD saw support defense two pips above the 1.3000 handle two weeks ago. EUR/USD showed a similar backdrop, with support two pips above the 1.1000 handle. But, since then, GBP/USD has run by as much as 432 pips (3.32%) while EUR/USD’s peak move has been 212 pips (1.93%).

For next week, I’m tracking support at this week’s lows around the 1.3312 level, and if that can’t hold, the zone around the 1.3250 psychological level is back in the picture.

GBP/USD Daily Price Chart

Chart prepared by James Stanley, GBP/USD on Tradingview

AUD/USD

While GBP/USD has shown a bit more recent strength than EUR/USD, AUD/USD has shown more than both as the pair remains in a strong two-and-a-half-week trend.

The pullback this week on the back of that DXY bounce found support at a key level in AUD/USD at .6824. That’s led to a further extension of the move and another fresh yearly high printing today, so this could perhaps be even more attractive for USD-weakness scenarios than GBP/USD looked at above.

More recently, support showed at prior resistance of .6871, which was last December’s swing high. And this provides some added structure for bulls to defend for topside continuation scenarios.

If we do see USD-bears drive next week, the next major level overhead in AUD/USD is the .7000 big figure.

AUD/USD Four-Hour Price Chart

Chart prepared by James Stanley, AUD/USD on Tradingview

USD/JPY

I’m looking at this as more of a wild card at this point…

As I’ve been saying, I think there remains a lot of carry unwind to be seen. I’m taking this from the fact that USD/JPY hasn’t yet re-tested the 38.2% retracement of the 2021-2024 major move that was driven by that carry theme of higher inflation leading into higher US rates.

But price action isn’t a perfectly direct relationship to fundamentals, and sentiment matters.

At the open of the prior week, we saw bears try to drive below 140.00 but they failed. This then led to a higher low at the 140.30 Fibonacci level, which was then followed by another higher-low after the FOMC rate cut announcement.

Bulls continued to show up in the week after and as of yesterday, there was a bullish break of a falling wedge pattern, often approached with aim of bullish reversals. And there was also the first 145.00 re-test in three weeks.

So, clearly that bearish fundamental argument was not only not being priced-in, but the pair was going the other way. As I’ve been sharing, my theory is that this was being pushed by a short-term oversold backdrop leading to short-cover.

But on Friday a massive reversal showed after the results of Japanese elections came-in. This led to a 400+ pip range as USD/JPY sank all the way down to the 142.50 psychological level.

This isn’t something that I think would be attractive to chase, but I would also be remiss to summarily dismiss the move. If we see sellers returning to show lower-high resistance, that bearish case can strengthen.

If we do see a strong push from sellers, I think the move can materialize fast at fresh lows, given that longer-term carry traders would now have even more incentive to close long positions as the rate divergence that drove the pair to fresh 37-year highs is continuing to narrow.

For next week, I’m tracking lower-high resistance potential at 143.05, 143.45, 144.11 and then the 145.00 handle. For deeper support, I’m looking at 141.69 and then the 140.30 Fibonacci level ahead of the 140.00 big figure.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

--- written by James Stanley, Senior Strategist