US Dollar to Yearly Highs as EUR/USD Breaks Down on Contagion Fears

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Talking Points:

– Big FX strikes within the in a single day session as the US Dollar broke out of the resistance that’s been in play over the previous two months, and this helped EUR/USD to commerce under the 1.1500 stage for the primary time in over a 12 months. The driver seems to be emanating from Turkey, as issues round monetary circumstances there have started to fear the ECB about publicity to the scenario in European banks. Contagion within the European banking system is one thing that has lengthy been a priority, and it seems that theme is now coming again into the highlight.

– The British Pound continues to meltdown, albeit for various causes. We even had a few sparkles of optimistic information earlier this morning round an improvement GDP together with some feedback from UK Finance Minister, Phillip Hammond, that he felt the possibilities are that the UK will get a Brexit-deal. Nonetheless, sellers stay firmly in charge of the foreign money as GBP/USD has now established a recent yearly low.

– DailyFX Forecasts on quite a lot of currencies such as the US Dollar or the Euro can be found from the DailyFX Trading Guides page. If you’re wanting to enhance your buying and selling strategy, take a look at Traits of Successful Traders. And for those who’re searching for an introductory primer to the Forex market, take a look at our New to FX Guide.

Do you need to see how retail merchants are at present buying and selling the US Dollar? Check out our IG Client Sentiment Indicator.

US Dollar to Fresh Yearly Highs on Turkish Concerns, EUR/USD Breakdown

US Dollar bulls have finally broken through. After seven weeks of battling with resistance on the space round 95.50, costs broke out within the in a single day session, simply forward of the Euro open. The main driver of the transfer seems to be emanating from a deeper breakdown in both EUR/USD and GBP/USD, and people breakdowns seem to be pushed by totally different drivers/causes.

US Dollar Four-Hour Price Chart: Breaking Out From Resistance to Fresh Yearly Highs

us dollar four hour price chart

Chart ready by James Stanley

In EUR/USD, the most important concern is now contagion in the European banking system. This is one thing that was worrisome through the European Financial Crisis and this even started to rear its head once more just some months in the past as political turmoil was beginning to present in Italy. But as the financial scenario in Turkey continues to worsen, the ECB is rising extra involved with publicity to the scenario in European banks. And given the tight buying and selling relationships throughout the banking sector within the Euro economic system, one or two banks changing into problematic may spell way more hassle for the opposite European banks that they commerce with.

Much like we noticed in May, traders haven’t wanted to wait around for confirmation as the promoting has continued. This introduced upon a break of the help stage at 1.1509, and we’re now buying and selling at recent yearly lows within the pair.

EUR/USD Four-Hour Price Chart: Breakdown to Yearly Lows on Contagion Fears

eurusd eur/usd four hour price chart

Chart ready by James Stanley

In a corresponding transfer, the US Dollar broke out to fresh yearly highs on the back of that EUR/USD breakout, catching a little bit of resistance on the 96.15 stage earlier than cauterizing help and pushing back-up forward of the discharge of July inflation numbers out of the United States.

US Inflation Remains Strong at 2.9%, Largest YoY Gain in Core CPI Since 2008

Perhaps misplaced within the shuffle of this morning’s surprising drivers was the release of July inflation numbers out of the United States. Headline CPI printed at 2.9% for the second consecutive month, matching expectations. But – on the learn of Core CPI, stripping out food and vitality prices, this morning’s print of 2.4% beat the expectation of 2.3%, and this represented the most important year-over-year acquire in Core CPI since 2008.

US Core CPI at 2.4% in July – Largest Year-over-Year Gain Since 2008

us monthly core cpi since july, 2017

Chart ready by James Stanley

On the entrance of headline CPI, this morning introduced the 11th consecutive month of inflation at-or-above the Fed’s 2% goal, placing the Central Bank squarely within the driver’s seat for continued charge hikes. This occurs even regardless of the seemingly bearish situations round Europe and the UK, which additional exposes the US Dollar for themes of strength as we commerce deeper into the second half of 2018.

US Headline CPI Comes in Above 2% for 11th Consecutive Month

us headline cpi since july, 2017

Chart ready by James Stanley

US Dollar Pushes Back Up to highs

The instant response within the Greenback after that inflation launch was a fast transfer back-up to the highs that have been set earlier this morning. Given the scope of right now’s breakout, that is smart as merchants at the moment are coming to grips with two elements of strength for the US Dollar: Both rate of interest coverage on the premise of financial coverage divergence mixed with obvious ‘safe-haven,’ flight-to-quality flows on the again of the rising concern of contagion within the European banking sector.

US Dollar Five-Minute Price Chart: Pushing Back-Up to Highs After Inflation

us dollar five minute price chart usd

Chart ready by James Stanley

Given the bullish response in the Dollar that had already been priced-in nicely forward of this morning’s inflation launch, mixed with the response after the information, and we will surmise {that a} rising concern round contagion has been driving safe-haven flows within the US Dollar. Case in level – USD/JPY isn’t exhibiting that Dollar-strength to the identical diploma as EUR/USD and GBP/USD, indicating continued Yen strength, which is able to usually present throughout risk-off environments. USD/JPY stays mired in a falling wedge formation whereas different main pairs are printing at recent yearly lows (or highs). This would level to the truth that the majority of this morning’s USD-strength is more-driven from concern (of contagion) than greed (for greater charges).

USD/JPY Four-Hour: Lack of Participation in Long-USD Party Indicates Risk-Aversion as Driver

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Chart ready by James Stanley

US Dollar Perspective

In our Q3 technical forecast on the US Dollar, we were looking for continuation of the bullish breakout that started in Q2. And whereas it’s taken virtually half of Q3 for that theme to come again to life, now that we’re at recent highs merchants would probably need to start plotting approaches based mostly upon continuation of this theme.

Prices at the moment are buying and selling above the 96.00 stage, which is the 23.6% Fibonacci retracement of the 2008-2017 main transfer within the foreign money. This generally is a powerful space to examine lengthy publicity, however that prior space of resistance that had held the highs within the Dollar for nearly two months can now turn out to be a pretty space to comply with for higher-low help on this theme. That space runs from 95.53 up to 95.66, and this could open the door for cease under prior help of 95.00 for topside continuation themes.

US Dollar Daily Price Chart: Ascending Triangle Breakout – Prior Resistance Now Becomes Support

us dollar daily price chart usd

Chart ready by James Stanley

EUR/USD Perspective

Earlier this week, EUR/USD did a resistance check at prior support – taken from the bullish trend-line that had constructed from late-June and held into early-August. That’s led to a breakout under the 1.1509 stage that had twice circled bearish advances, and with the pair now buying and selling at recent lows – the door is opened for extra.

The complication in the intervening time is considered one of positioning as costs are pretty distant from any close by factors of resistance, and this could make managing threat a little bit of a problem. But – a lot as we checked out above (solely in reverse) might be utilized for continuation methods right here. We had the construct of help over a month-plus of price action, and that prior space of curiosity can now be re-utilized for resistance potential. Below, we have a look at three totally different ranges that can be utilized for such a theme as we transfer in direction of subsequent week.

EUR/USD Four-Hour Price Chart: Lower-High Resistance Potential for Bearish Continuation

eur/usd eurusd four hour price chart

Chart ready by James Stanley

To learn extra:

Are you searching for longer-term evaluation on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a bit for every main foreign money, and we additionally provide a plethora of sources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders may keep up with near-term positioning by way of our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX affords a plethora of instruments, indicators and sources to assist merchants. For these searching for buying and selling concepts, our IG Client Sentiment reveals the positioning of retail merchants with precise dwell trades and positions. Our trading guides deliver our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX workforce. And for those who’re searching for real-time evaluation, our DailyFX Webinars provide quite a few periods every week in which you’ll be able to see how and why we’re taking a look at what we’re taking a look at.

If you’re searching for academic info, our New to FX guide is there to assist new(er) merchants whereas our Traits of Successful Traders research is constructed to assist sharpen the talent set by focusing on threat and commerce administration.

— Written by James Stanley, Strategist for DailyFX.com

Contact and comply with James on Twitter: @JStanleyFX



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