US Dollar Technical Forecast: Bullish
The US dollar has just finished a very busy week. The previous week ended with misfortune and sadness as risk trading tightened ahead of the FOMC forecast tightening. And then on Monday, word started to spread that the Federal Reserve was now looking at a 75 basis point hike instead of the 50 basis point move it had been grooming everyone for. This helped push the USD higher, eventually setting a new 20-year high on Tuesday, which was eclipsed by a new 20-year high on Wednesday, just after the FOMC released the statement officially announcing the move.
What happened after that, however, surprised many. Thursday, the day after the announcement of the FOMC hike, the currency fell more than 2%. I answered a number of questions on Twitter wondering why or how this could happen. The answer isn’t entirely clear, but the next morning a Swiss National Bank rate hike of 50 basis points surprised many, and this was followed by the Bank of England warning that the inflation could run as high as 11% in their economy later this year.
Thursday ended up being a quick comeback day as setbacks played out across EUR/USD, GBP/USD and USD/JPY. But, a bit of news delivered on Thursday evening (Friday morning in Asia) that brought the USD bulls back on the supply side. The Bank of Japan maintained its stable policy while avoiding any proclamation of defense of the currency. The yen has been beset by a major influx of weakness coming this week and USD/JPY has pulled back aggressively ahead of this meeting. I will discuss this theme further in the USD/JPY section as it may have some actionable context for the week ahead.
I want to start with the monthly chart here because frankly, we’re in the middle of some historic USD moves. There is also some relevance of a Fibonacci retracement produced by the major move of 2001-2008, with the 61.8% Fibonacci retracement coming into play as support in May and June. Last month saw the pullback with support settling around this spot, and June opened with bulls making another move to create a rebound from this support.
Prices holding above this level keep the door open for further bullish pursuit.
Table of monthly prices in US dollars
Chart prepared by James Stanley; USD, DXY on Tradingview
In the shorter term, the trend is less certain given the recent pullback. From a fundamental perspective, the possibility of greater strength exists, largely drawn from the deviation discussed earlier. But, technically speaking, we only have one day of strength after this aggressive pullback developed after the Fed. And the culprit of this pullback is likely to remain a noteworthy theme in the coming week and the focus is on the ECB and the European Central Bank for possible hints of greater hawkishness there, which I’ll talk about a little lower in the EUR/USD heading.
In USD, breakout strategies remain attractive on impressions of new highs. The next logical resistance on the chart would be around the 106.00 level, after which a prior swing from 2002 comes into play around 106.56.
For support, the area around 102.65 looks relevant, as it helped establish short-term resistance in an ascending triangle formation the previous week that started to give way after the ECB’s rate decision. And, of course, below that we have the Fibonacci level of the longer-term chart plotted at 101.80.
US dollar daily chart
Chart prepared by James Stanley; USD, DXY on Tradingview
It was less than a week after the ECB’s rate decision that the bank convened for an emergency meeting. That’s usually not a good sign and if so, its recognition that the banks’ messaging could have done a better job around the rate decision.
This message was extremely accommodating, all factors considered. European inflation is above 8% and, like the Fed, the central bank is way behind the curve. But, while the Fed hastily tries to catch up, the ECB is still reluctant to tighten its stances given the ongoing war on the eastern border, which poses a considerable risk going forward. However, in the last rate decision, the ECB talked about a 25 basis point hike in July, which doesn’t seem to be doing the job.
But, due to this dovish attitude, the EUR/USD bottom fell quickly after this meeting and the bearish theme lasted for much of the past week. But – at this point, the pair is yet to hit the 20-year low which sits at 1.0340. EUR/USD had nearly broken through in May, then again around the FOMC statement. But, if the ECB doesn’t make any announcements about a more hawkish policy, either through statements or through leaks, which is not uncommon, then we could see that new low in the pair before too long.
For short-term resistance in the pair, the same 1.0593-1.0638 zone remains. This is the spot that made the weekly high after the USD pullback and until that is broken, EUR/USD continues with a bearish range.
EUR/USD four-hour price chart
Chart prepared by James Stanley; EURUSD on Tradingview
The Bank of England raised rates by 25 basis points last week. But, a lot had already happened before we got there.
The week started with a breakout as GBP/USD fell below 1.2000 psychological level for the first time in over two years. This led to a pullback that really got stronger on Thursday, when the USD retreated. This allowed GBP/USD to climb as high as 1.2480 before starting to fall again.
On Friday, some short-term support started playing around previous short-term resistance; and this may support a continued upside move to the previous support zone ranging from 1.2452 to 1.2500. At this point, shorts might become attractive again, but that would depend on the situation.
GBP/USD eight-hour price chart
Chart prepared by James Stanley; GBPUSD on Tradingview
The longer term AUD/USD chart remains in a bull flag formation and this week has seen some defense around a higher low from the May inflection. Although this is far from a bullish picture, it does open up the possibility of a rebound if we see continued defense of this spot on the chart. This stretches from around 0.6825 to 0.6850 and a hold here keeps the door open for bounce potential. In case of a breakout, however, the next level of support down is around the psychological level of 0.6750, which is the 50% mark of the major move of 2020-2021.
AUD/USD Weekly Price Chart
Chart prepared by James Stanley; AUDUSD on Tradingview
By the close of business on Thursday, it looked like the markets had started to expect the BoJ to start getting more hawkish.
At the beginning of June, BoJ Governor Kuroda once again ignored the inflation observed in Japan while seeming opening the door to even more yen weakness. I had reviewed this earlier in the month and which led to a new 20-year high for USD/JPY which was fixed earlier last week.
But, Kuroda was forced to backtrack on some of those comments while apologizing to the Japanese public for downplaying the impact of inflation. A similar fury that has been seen elsewhere but, in Japan, the Central Bank actually apologized to the public for it. Inflation hit 2.5% last month, the highest level seen since 2008. Kuroda said the BoJ wanted to wait for “stable” inflation before making policy adjustments.
As we moved into Thursday’s BoJ meeting, markets were beginning to expect some change at the BoJ. USD/JPY fell back below 132.00 and a number of yen pairs set up possible reversals. But, when we arrived at the meeting, the BoJ sounded more dovish than ever, saying it was “closely watching” developments in the forex market without making any statements or threats as to what it might do. if the situation became even more untenable.
The direct response has been a quick return of Yen weakness and already USD/JPY has pushed back the psychological level of 135.00 and heading into next week the potential for further upside remains. Given the current price proximity, the potential for a breakout remains. If a pullback develops, potential high-low support exists both at 133.22-133.41 and a bit lower around 132.06-132.50.
Eight-Hour USD/JPY Price Chart
Chart prepared by James Stanley; USDJPY on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow james on Twitter: @JStanleyFX