Market Outlook – DailyFX

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US Dollar Talking Points:

– Q4 has started off in a trending fashion as the moves that showed prominently to end Q3 have largely remained. EUR/USD pushed down to a fresh six-week low and the US Dollar has driven right back to June resistance around the 95.53 level. This theme in both markets appears to be driven by dynamics around Italian politics along with a potential debt stand-off, and Italian bond yields have been rising of recent to incorporate this additional risk. This has driven the Euro lower, very similar to what was seen in the month of May. During that run – sellers took a step back from the ledge as calm developed in June.

– While a bit of risk aversion continues to show in some currencies such as the Euro, US Dollar or British Pound; other markets are showing very different themes. Both US and Japanese equities remain strong while trading near key high watermarks: The Nikkei is trading at fresh 27-year highs after last month’s bullish breakout while the S&P 500 caught a bounce from confluent support yesterday to re-approach those all-time-highs set just a couple of weeks ago.

– DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

EUR/USD Bulls Push Back to Key 1.1530 Level

It’s been an active open to Q4 already and both the Euro and US Dollar have remained on the move, furthering their quarter-end trends. In EUR/USD, prices have already sunk down to a fresh six-week-low before catching a quick bounce off of the 1.1500 psychological level. This support remained unfettered through September as buyers were able to hold the line at 1.1530; but already on the new quarter sellers have been able to push-lower, keeping the door open for a deeper bearish break down to fresh lows.

EUR/USD Eight-Hour Price Chart: Sellers Persist, 1.1530 Back in Play

Chart prepared by James Stanley

The pace of selling in the Euro is very similar to what was seen in the month of May and then again in early-August. This is when the single currency was being pushed lower as a series of bigger-picture threats came to light. In May, we were looking at pressures emanating from Italian politics, fearful over a potential debt stand-off between the ECB and the newly-elected Italian government. That seemed to take a backseat as we traded into June, but EUR/USD remained a few hundred pips from where we were in February and March. Early-August saw fresh fears emanate from the situation in Turkey, worried about the potential for debt contagion within Euro-Zone banks. But that, too, took a back-seat in late August as EUR/USD recovered the entirety of those losses and then some.

But more recently, as in over the past week, fears have re-fired as driven by dynamics in Italy. The Italian government proposed a budget last week that will likely be rejected by Brussels, and this has driven a fresh host of fears that we may be at the early stages of an impasse between the powers that be in Europe, and the Euro-Skeptic parties that were voted to power in Italy a few months ago.

Italian bond yields have continued to spike over the past couple of weeks, and this has driven selling in the Euro. Will we see these fears take a step back as we saw in May/June? Or are we in for something different this time as Italy pushes the envelope with a Brussels that appears backed into the corner?

For its part, EUR/USD has shown no signs yet of slowing down. We did get a bump from that failed attempt to take out 1.1500 earlier this morning, and prices in the pair even moved back for a re-test of prior support. But sellers came back in fairly soon, and prices have pushed right back down towards that 1.1530 prior support.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley

US Dollar Drives Back to July Resistance

In a corresponding move, the US Dollar is back to testing June highs as Dollar bulls have re-grabbed control of near term price action. As we wound down Q3, USD was in an anemic state after a bearish trend had developed over the second-half of Q3. But the past week has produced a remarkable recovery that has seen the US Dollar shoot right back-up to the 95.53 level that helped to set a double top in June.

US Dollar Eight-Hour Price Chart: Don’t Call it a Comeback

Chart prepared by James Stanley

On a shorter-term basis, we saw higher-low support hold at the 95.00 level as we ended Q3 and again after we opened Q4, and given the historical relevance of this psychological price, this could be used for bullish continuation strategies. Traders looking to buy higher-low support can look to place stops below this level while traders looking to be a bit more conservative or patient can wait for prices to move closer to 95.00. If we see higher-low support show ahead of a re-test, the door remains open for topside setups. If it doesn’t, no long trade is taken until a more-confirmed item of support avails itself.

US Dollar Two-Hour Price Chart: Support at Prior Resistance of 95.00

Chart prepared by James Stanley

GBP/USD Begins Test of Trend-Line Support

Dollar strength has shown quite prominently against the British Pound as well, and after a quick move lower to start the quarter, GBP/USD is appearing to attempt to carve-out support around a key zone that we’ve been following. The zone runs from 1.2918 up to 1.2956, and the topside of that support area helped to catch the lows yesterday and that has since held into today.

This is confluent with a bullish trend-line that can be found by connecting the August and September swing-lows in the pair. A breakdown below this trend-line and below that 1.2918 level opens the door for a re-test of prior swing support around 1.2800.

GBP/USD Two-Hour Price Chart: Confluent Support Holds the Lows For Now

Chart prepared by James Stanley

USD/JPY Sustains Breakout to Set Fresh 2018 High

We’ve been following the re-emergence of Yen weakness, as this was a big takeaway from a full day of data in the middle of September. That Yen weakness has largely remained and USD/JPY is now trading at fresh 2018 highs as bulls have largely kept control of near-term price action.

At this stage, we’re seeing resistance show from a confluent level around 114.00. This is both the 23.6% Fibonacci retracement of the 2016-2017 major move, as well as the 23.6% retracement of the ‘Abenomics’ move in the pair, taking the 2011 low up to the 2015 high.

USD/JPY Four-Hour Price Chart: Bulls Push to Confluent 114.00 Level to Produce Fresh 2018 Highs

Chart prepared by James Stanley

On a longer-term, bigger-picture basis, this move has some relevance as we’ve seen the initial break of a symmetrical wedge pattern that’s been brewing for the past two years. This 114.00 level is big, as this is the same area that held the highs in the pair for the bulk of 2017, before bulls finally succumbed to selling pressure as we opened up 2018.

USD/JPY Weekly Price Chart

Chart prepared by James Stanley

Nikkei Fresh 27-Year Highs to Open Q4

We’ve been following this throughout September as a rather aggressive bullish breakout has gotten underway in Japanese equities. Coming into last month, prices had built into an ascending triangle pattern that will often be approached for bullish breakout potential. It didn’t take long for that formation to fill-in, and the second half of September saw bulls continue to push the advance as prices ran up to fresh 27-year highs.

This will remain a theme of interest as we trade deeper into the final quarter of this year. The fact that this equity strength is taking part in-tandem with Yen weakness is probably not coincidental; and if these themes can remain as we move deeper into October, the door remains wide open for bullish continuation stances in the Nikkei along with bearish strategies for the Japanese Yen.

Nikkei Weekly Price Chart: Bulls Continue to Push up to Fresh 27-Year Highs

Chart prepared by James Stanley

S&P 500 Bulls Continue to Push Back-Towards All-Time-High

Enthusiasm remains in US equities as bulls have continue to push-higher. Resistance remains around 2940, but support has also been operable as the bullish trend-line connecting the Q3 lows remains in play as we move into Q4. Yesterday’s lows saw a test around this trend-line which syncs up fairly well with the prior all-time-high at 2915, and as long as prices remain supported here, the door remains open for bullish continuation strategies in the index.

S&P 500 Four-Hour Price Chart (Logarithmic): Q3 Bullish Trend-Line Holds the Lows

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q4 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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