- The US Dollar Index (DXY) indicates a potential peak, highlighted by a bearish evening star pattern.
- The EUR/USD has successfully broken out of a falling wedge formation, now testing resistance at 1.0460.
- USD/JPY is approaching a significant uptrend following a hawkish rate hike from the Bank of Japan.
- Upcoming meetings from the Fed and ECB are expected to deliver surprises next week.
Summary
There are signs that the US Dollar Index (DXY) might be losing strength, with a bearish evening star pattern emerging alongside declining momentum indicators. The EUR/USD has broken upward from a falling wedge, while USD/JPY is teasing a vital uptrend following the recent hawkish hikes from the BoJ. Price movements near key technical levels could be pivotal for medium-term trends, as the dollar’s dominance appears to be faltering—confirmation will be key!
Is DXY Dominance Ending?
Unless a significant rally occurs before Friday’s close, the weekly chart for the US Dollar Index (DXY) suggests that a cycle high may have already been reached. The current three-candle formation resembles a classic evening star, which typically appears at turning points. This follows an accurate morning star signal in early December and a prior evening star in late June of last year.
Source: TradingView
This recent signal gains importance, especially as it coincides with a breakdown in the uptrend that began after Trump’s election. The RSI (14) uptrend from September has been breached, and while not yet confirmed by the MACD, it seems to be in the early stages of signaling a shift.
Traders should monitor the potential break below the 107.75 support level, which the DXY has held for three of the past four weeks. A breach of this level could lead to downside targets at 106.736 and 105.44.
Although not purely technical, it’s noteworthy that market expectations for Fed easing have been significantly reduced, falling from six rate cuts to fewer than two since September. This transition leaves the dollar susceptible, especially as much optimism about the US economy is already factored into prices.
Source: TradingView
As the euro and Japanese yen are two of the largest components of the DXY, the reversal pattern may impact their movements if it proves to be an accurate predictor, particularly as fluctuations in EUR/USD and USD/JPY often lead market trends rather than follow them.
A glance at the weekly charts suggests that immediate price movements could significantly influence longer-term trends for both currency pairs, especially given the reduced likelihood of a trade war escalation. Recent softening of tariff language from Donald Trump, particularly regarding China, supports this narrative.
Furthermore, the Bank of Japan’s hawkish inflation predictions, along with a 25 basis point increase in overnight rates, combined with signals for more hikes ahead, adds pressure on the dollar, suggesting its post-election dominance is increasingly under threat.
EUR/USD Likely to Rise
Source: TradingView
The EUR/USD has broken out of a falling wedge decisively this week and is now testing horizontal resistance at 1.0460. With the RSI (14) breaking its weekly uptrend and MACD beginning to rise towards the signal line, the momentum may be shifting bullishly, enhancing the likelihood of a continued upward trend.
If the price can break and stabilize above 1.0460, traders considering bullish positions could look to establish long positions while placing protective stops below. Possible upside targets include 1.0600, 1.0666, and 1.0762, depending on individual risk tolerance.
As previously noted this week, it seems unlikely to witness any major surprises from the Fed or the European Central Bank in their upcoming meetings.
USD/JPY Reaction to Hawkish BoJ
Source: TradingView
The USD/JPY is approaching a crucial level following the Bank of Japan’s recent actions, resting just above the uptrend that commenced with the Federal Reserve’s interest rate cuts. Although this trend remains intact for now, the RSI (14) has already broken its upward trend, and the MACD is showing signs of declining momentum.
If the uptrend breaks, traders may consider entering short positions with protective stops above. Looking to the downside, key levels include 153.30, the 50-week moving average, and significant horizontal support at 151.95.
Should USD/JPY maintain its uptrend, the scenario could shift, allowing for long positions above with stops below for protection. Those contemplating a bullish strategy may target 158.76 as a potential price point.
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