US Dollar Discussion Items:
It’s an eventful S2 and also The uptrend of the US Dollar is now more than a year old. The greenback gained support at 90 psychological level in DXY last year and this is shown in January/February and May/June. Last year’s Q3 saw prices in the USD move towards short -term resistance, with a breakout shown in September shortly after the Fed began predicting a real rate hike for 2022.
At the time, the SEP highlighted only one rate hike in 2022. Inflation at the time was already above 5% after the CPI was printed at 5.3% for August. But, a simple move to highlight a single rate hike in 2022 is enough to show the market that the Fed will, in fact, respond at some point.
It just took a long time, longer than many expected.
Banks finally started climbing in March. Inflation had soared to 7.9% at the time and a 25 basis point rise at the meeting did little to help settle the higher price trend, with the May CPI coming in at 8.6%. But-the bank continues to talk about the potential for more hikes and the past two rate decisions have brought movements of 50 and 75 basis points respectively, indicating that the Fed is ready to take tough medicine here in a bid to tackle inflation.
Europe, on the other hand, seems to be quite far behind the same trend. Inflation in Europe has surpassed 8% and most likely, there will be more profits there. At this point the ECB has mentioned a 25 basis point increase in July followed by another possible increase in September. But – will this get the job done? Or – will the ECB find themselves in the same place as the Fed, in a hurry to try to pursue policy in an effort to curb rampant and persistent inflation?
This will be an issue for Q3 but the answer to this question is key for the trajectory of the US Dollar, which has enjoyed a strong ride over the past year behind the FOMC which stands out as the most hawkish Central Bank in the developed world and given inflation rates elsewhere, this may impermanent.
Take a long -term outlook on the USD and the currency remains above the large resistance zone. The 103.82 level is the highest level in 2017 and more recently, it has helped as a place of short-term support. But, also throwing is a Fibonacci retracement at 101.80 which helped gain support at the end of May.
Notable, however, was the upper axis on last week’s candlestick, indicating a reversal. And this came shortly after the FOMC released their rate decision showing a 75 basis point increase. And when the market doesn’t move higher on good -looking news, look below, because something else may be evolving for what’s around the next corner.
US Dollar Weekly Price Chart
Charts provided by James Stanley; USD, DXY on Tradingview
The second quarter was a tough match for the Euros. A big spot to note in EUR/USD is the area around the current 19 -year low at 1.0340. This was set in 2017 just before the pair installed a 2,000 pip tilt that occurred the following year.
Recently, when the strength of the USD started to appear online in the last Q2, EUR/USD started a downtrend that didn’t really stop and even slowed down-the price continued to fall.
So when the price action was lower in early May with the 1.0340 support view, the call for parity quickly filled the news feed when banks started looking for that elusive print at 1.0000, which hasn’t happened since 2002. And it doesn’t happen here the same there, as support appeared about 12 pips higher in early May.
And again-shortly after the FOMC rate hike, when the USD soared to its own 20-year high, EUR/USD pushed down to support and, again, set higher-lows.
This does not necessarily predict a complete reversal. But, it may have enough in it to allow for a bit of retraction. And if we see the fundamental tidal shift in Q3, maybe something more could develop. But, in general, I expect that support will give way eventually. We may need a deeper pullback measure to eliminate some of the remaining stops on short positions that have followed this trend that is more than a year old now.
EUR/USD Weekly Price Chart
Charts provided by James Stanley; EURUSD on Tradingview
It was an even more painful quarter for the GBP as the Euro outperformed the British Pound in Q2, which could be witnessed by a break in the EUR/GBP.
But, for sure, the Bank of England will face the same issues as the ECB with inflation expected to continue to rise there. In the UK, the BoE has been ahead on their expectations which include the possibility of a recession when inflation rises above 10% late this summer. The difference, however, is that the BoE has already begun the process of rate hikes.
In GBP/USD, the pair crossed last week’s high level at 1.2000. A strong pullback developed soon after, and there may be little more room for the theme to work, with possible resistance in the 1.2452-1.2500 area on the chart. If that is not the case, there is another place of previous support/resistance overhead, plotted around the 1.2650 area on the chart.
GBP/USD Weekly Price Chart
Charts provided by James Stanley; GBPUSD on Tradingview
The big question for Q3 in USD/CAD is whether the pair can pass 1.3000. To be sure, there are tests and there is a resistance zone running from 1.2950-1.3000 that has basically been tested since last August. So far, none of those tests have led to a lasting break even though last week looked promising until the price pulled back for support at 1.2950.
This keeps the door open for a potential bullish breakout into Q3, with the possibility that the pair will eventually break above and leave the 1.3000 level behind (at least for a while).
USD/CAD Weekly Chart
Charts provided by James Stanley; USDCAD on Tradingview
How long can the BoJ maintain their heavy occupancy rates? That’s a big question for the S3 and it probably won’t go away any time soon. Last week heard banks keep the same ‘watch closely’ words in their statements on the Yen’s weakness and the market saw this as a clear sign to resell the currency, leading to a new 24-year high in USD/JPY.
But, the idea of this theme lasting for another full quarter, especially as most other global central banks grow more hawkish, seems a bit tricky.
That’s not a current concern, however, and the USD/JPY pair remains very close to the newly established 24 -year high, and the previous resistance point around the 135.00 psychological level is now a potential support.
USD/JPY Four Hour Price Chart
Charts provided by James Stanley; USDJPY on Tradingview
— Written by James Stanley, Senior Strategy Specialist for DailyFX.com
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