US Dollar Technical Forecast: Bearish
It was a back-breaking week for USD bulls, and the kind of backdrop that often foils retail traders. Like a light switch being flipped off, the hard and fast USD bullish breakout from last week was erased, and then some, as Euro bulls started to toe the line.
While last week’s USD breakout was rather intense on the heels of the FOMC rate decision, Friday price action after that meeting showed a doji. And on Monday, prices continued to peel back, confirming an evening star formation, which will often be approached with the aim of bearish reversals. And that formation had some pretty significant follow-through Tuesday-Thursday, with continued losses on each day.
US Dollar Daily Price Chart: Evening Star Reversal
One of the main drivers appeared to be expectations for NFP to print in negative territory, with even the White House warning of a bad jobs report due to Omicron. But, that’s not what happened: Instead, NFP for the month of January printed at a whopping +457k, with Average Hourly Earnings jumping up to 5.7% from a prior read of 5% and an expectation of 5.2%.
This speaks directly to the quandary surrounding the FOMC at the moment. They’ve avoided tightening policy for a while now under the presumption that inflation was transitory. And while Powell attempted to ‘retire’ that word in November at his confirmation hearing, the bank still has yet to make any actual changes to policy. Markets are geared up for a 50 basis point hike in March but that’s seemingly been priced-in already; and the currency instead appears vulnerable to hawkish shifts in counterparts, even the Euro as was seen this week from the EUR/USD response to the ECB rate decision.
In the US Dollar, the weekly bar is closing as a bearish engulfing candlestick and this highlights the potential for further losses, near-term. Bearish engulf formations will often signal a change in momentum and given the changes in the backdrop, the technical formation would mesh with the potential for continued volatility in the fundamental setting.
US Dollar Weekly Price chart: Bearish Engulf
Chart prepared by James Stanley; USD, DXY on Tradingview
If the US Dollar is going to continue to sell-off, it’s likely going to need some help from the Euro with an extension of the bullish trend in EUR/USD.
The mirror image of the evening star in the USD that confirmed on Monday showed in EUR/USD with a morning star over the same period. I wrote about that on Tuesday, ahead of the ECB rate decision while highlighting the potential for continued a continued reversal.
I also highlighted that major zone of resistance that rests from 1.1448-1.1500, which is where price finds itself ahead of the weekend. At this point, after five consecutive days of gain, the prospect of continuation may appear daunting. But, similar to the above USD weekly, price action in EUR/USD closed as an engulfing candlestick and similarly this points to the possibility of further upside.
On a shorter-term basis, higher-low support potential exists around prior levels of interest, around 1.1380 and a little lower around 1.1272. A hold of support at either spot keeps the door open for bullish continuation.
There’s also breakout potential given the hold of resistance at 1.1484, which marks a double-top formation that’ll often be followed with the potential for topside breakout potential.
EUR/USD Daily Price Chart
Given the move in EUR/USD driven by some simple hints of ‘less loose’ monetary policy, one might’ve expected GBP/USD to have put in more vertical movement considering that the BoE did, in fact, raise rates this week.
And while that rate decision did lead to a bit of strength, the move was erased on Friday with price action quickly returning to a trendline that makes up the bull flag formation in the pair. That bull flag was vigorously tested in early-December, with buyers jumping in mid-month after the BoE hiked rates at that meeting.
Traders would likely want to remain cautious here as similar to the U.S. and the US Dollar, rate expectations have really built-in and it could be difficult for much more re-pricing to take on there. But, the longer-term chart seemingly remains conducive to topside forecasts, with the bull flag still in order, helping to keep topside potential in the equation.
GBP/USD Weekly Price Chart
AUD/USD Hold at the Big Fig
There was a rate decision in Australia earlier in the week, and while the bank may not have been as hawkish as expected, the RBA continues to wind down bond purchases, which keeps the door open for a greater hawkish push at some point this year.
From a technical perspective the .7000 psychological level continues to loom large on the pair, much as it has since 2019. Sellers haven’t fared well with tests below this level, most recently last week, and this has allowed for a falling wedge to build. Falling wedges are often approached with the aim of bullish reversals and this syncs with the bearish potential in the USD. For next week, wedge resistance projects to around .7220, and near-term swing resistance resides around the .7300 spot.
AUD/USD Weekly Price Chart
USD/JPY Rising Wedge
Given the move in rates, with US Treasuries across the curve pushing up to fresh yearly highs, one might’ve expected USD/JPY to have followed that theme.
But this week produced a doji on taking a step back, there’s a rising wedge formation which highlights the potential for bearish reversal scenarios. After the support hold at 113.48, prices have shown a tendency to struggle above 115.00 of recent and there’s now been a lower-high that printed as the support side of that wedge has started to falter. All of this has happened even as the Bank of Japan has remained stable on the rates front, assuring markets that they don’t yet have plans to move away from their easy-money policies, even as counterparts around the world are doing so.
This can similarly keep the door open for bearish scenarios in both the US Dollar and USD/JPY.
USD/JPY Daily Price Chart
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX