When learning to implement fundamental analysis with a technical approach, one of the most important things is trying to find the path of least resistance. And while we’re all attuned to locating resistance on charts, this can have a fundamental implication, as well.
Such a scenario seems to exist in the FX market as the page turns into 2022, and for that reason I’m looking at long USD as my top trade for Q1. While many other economies wrestle with covid and slow economic growth, the U.S. may see the Federal Reserve push into a hiking cycle in an effort to stem inflationary pressure. This is happening as the ECB remains loose and dovish and that’s a big deal for the DXY, of which over 57% is allocated towards the Euro.
At this point, from both a fundamental and a technical perspective, the path of least resistance appears to flow through a stronger US Dollar. With low rate regimes in both Europe and Japan, the fundamental forces continue to tilt towards the U.S., and from a technical perspective, the USD put in an impressive breakout in Q4 that catapulted price up to a key zone of resistance, with Fibonacci levels between 95.86 and 96.47 holding the highs before a series of dojis developed.
US Dollar Weekly Price Chart
Chart prepared by James Stanley; USD, DXY on TradingView
Normally, when indecision shows at a big spot of resistance following a really strong move – pullbacks come into favor. But that didn’t take place in the US Dollar, as buyers helped to hold support and that keeps the door open for deeper topside into Q1 trade.