US Dollar Strongest Week Since Sept. 2022: EUR/USD, USD/JPY, Gold

US Dollar, EUR/USD, USD/JPY, Gold Talking Points:

• It was a big week for the Dollar. Last Friday I looked at DXY after it set another fresh yearly low that sellers failed to capitalize on. That was accented by a Core PCE report that saw YoY move-higher for the first time in over a year, indicating an element of stall with inflation.
• This week saw USD bulls take over, breaking above a falling wedge formation that I’ve been tracking over the past month. Helping the push was EUR/USD breaking back-below the 1.1000 level after having stalled at 1.1200 for more than a month. But there was also a massive move in USD/JPY as the incoming Japanese PM talked down the prospect of additional rate hikes.
• CPI is the big driver for next week but that’s not until Thursday. I’m expecting Fed-speak to lean dovish until that.

Deduction can be a powerful tool in trading and analysis. I looked at that on Monday, just after the USD set a higher-low above the Friday swing that established a fresh yearly low. EUR/USD opened the week with another failed breakout at 1.1200 and that’s something that had been going on for more than a month, with a long-term Fibonacci level marking the top in the prior week at 1.1212.

On the fundamental side, the dovish Fed-speak continued but data began to paint a different picture. The Core PCE report from last Friday showed an element of stall with that data point increasing on a YoY basis for the first time in over a year. That helped to keep USD-bears restrained even at the print of a fresh low.

This week started with sellers taking another shot but, a higher-low held and prices began to rally. On Tuesday, the first day of Q4 trade, USD bulls pushed a breakout of the falling wedge that’s been building over the past month, and they didn’t look back, pushing the strongest week in DXY since September of 2022, when the currency had topped.

DXY ripped through all the short-term resistance levels I had looked at last Friday and now there’s bullish structure to defend, with a key zone around the 102-102.15 area. But perhaps the bigger question here is whether EUR/USD bears can continue their push…

US Dollar Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD

Back in 2022 when the US Dollar had topped, that them was very much helped along by a European Central Bank that was starting to ramp up their own rate hikes, right around the time that the Fed was ramping down.

Perhaps most surprising is just how consistent the bullish trend was in EUR/USD during the first two months of Q3. The European Central Bank was in a rate cut cycle before the Fed but that didn’t seem to matter much in the pair.

I’ve been open with my theory, that the push was emanating from a USD/JPY carry unwind theme that drove widespread USD-weakness. And in pairs like GBP/USD and AUD/USD, that weakness pushed fresh yearly highs in those pairs. In EUR/USD, however, bulls weren’t able to make much ground above the 1.1200 handle. And now that we have a turn to work with, the big question is whether we’ll see continuation of the range that’s remained in-play for the past 21 months.

EUR/USD Weekly Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

EUR/USD 1.1000 is Big

The 1.1000 level saw ardent defense from bulls in September, just days ahead of another ECB rate cut. Price held a higher-low just two pips above the big figure before starting to turn, which then led into a ‘rate cut rally in the pair.’

But – the same 1.1200 level that stalled the move in August did so again for the last two weeks of September. And with USD bulls coming back to the table in Q4 that’s led to a tilt-lower in EUR/USD.

So, we have a massive downside move to work with, but bears are going to need to keep the pace to keep the door open for longer-term range continuation. For next week, this keeps open the scenario of lower-high resistance at 1.1000 and if that can’t hold, 1.1055. For next support, it’s the same 1.0943 level that I’ve been tracking. That’s the 50% mark of the same Fibonacci retracement that caught the high last year and the low so far this year. A closed-body break on the daily through that will give a greater appearance of bigger picture mean reversion, pointing towards 1.0750 and then around 1.0600 for longer-term supports.

EUR/USD Daily Price Chart

Chart prepared by James Stanley, EUR/USD on Tradingview

USD/JPY

I’ve been calling USD/JPY a wild card since last Friday…

The pair put in a massive sell-off on the back of Japanese elections. My theory there was that change in leadership, combined with a strong 600+ pip rally off the prior September lows brought upon more carry unwind in the longer-term, bullish theme in the pair.

This week opened with a continuation of weakness, all the way until the August low of 141.69 came into play. That’s when bulls crowded back in and pushed a massive move which has continued into the end of the week.

I’ve seen some smart people saying that this was carry coming back. I’m not so sure about that. I think this very well may be more unwind of the shorter-term bearish theme that saw more than 2,000 pips taken out in a little over a month. We’ve only retraced a little more than 40% of that sell-off and, at this point, the 50% mark of that sell-off sits in a massive zone of long-term importance.

It’s the 150-151.95 zone that’s held a big sway in the pair for two years now, when it helped to set the highs before a 50% retracement of the 2021-2022 major move.

USD/JPY Weekly Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

Because if we look at this from a fundamental basis – the Fed still wants to cut, it just seems to be a matter of how quickly they can do that given the data. This would mean more narrowing in the rate divergence between the US and Japan. And while incoming PM Ishida backed off the prospect of rate hikes this week (when monetary policy becomes a fiscal problem, but that’s for another article), it’s not like the bigger threat to rate divergence was from Japan but the US.

Whether I’m right or wrong, we will have to wait and see, and I think the 150-151.95 zone is a major decision point in the pair. For those still holding long carry that would be an attractive spot to get out before larger unwind themes may show on the back of that narrowing rate picture.

For now, bulls are large and in charge and there’s no point in arguing with price action, such as I shared in the video earlier this week.

For levels – The 148 zone is now higher-low support potential, and a hold there would be an aggressive spot for bulls to defend. A little lower is the 147.18 level followed by 146.50. Sitting overhead is the major psychological level of 150, the 50% mark of that sell-off at 150.77 and then the 151.95 level that was twice defended by the BoJ in Q4 of 2022 and 2023 before becoming support in May and July of this year.

USD/JPY Daily Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

Gold

Despite the massive rally in the USD this week, Gold has barely blinked, still holding near all-time-highs and showing only minor pullbacks. I think the push-point here is the dovish Fed speak and the fact that the bank is still expected to cut rates, even in light of positive economic data. To be clear, gold remains overbought on both monthly and weekly charts although the daily overbought reading has eased since I wrote about it previously.

But – I would still be cautious with getting too bearish at this point and, if anything, would continue to track higher-low support potential at 2622 and 2600.

Gold Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist