The US Dollar has demonstrated remarkable strength recently, extending its bullish momentum for the seventh consecutive week. This surge stands in stark contrast to the Dollar’s weakness observed during the third quarter of the year. The Dollar Index (DXY) is currently testing range resistance, a significant development highlighted by the closure of a gap dating back to last November’s Federal Open Market Committee (FOMC) meeting. This period marked a shift in the Federal Reserve’s tone, suggesting an end to rate hikes and the potential onset of rate cuts. Simultaneously, the EUR/USD pair is hovering around range support, bringing the concept of two-year mean reversion into sharp focus for the upcoming week. For traders monitoring the critical 105 Eur Usd level, understanding these dynamics is crucial.
US Dollar bulls have indeed made a strong statement in the fourth quarter, even though we are only halfway through. The pervasive weakness of the US Dollar during the initial months of Q3, following a test of the 106.00 level, has been replaced by a swift shift in Q4. This change in sentiment coincides with the Federal Reserve adopting a less dovish stance.
Interestingly, the US Dollar’s bearish momentum didn’t persist significantly after the Fed’s initial rate cut. This was likely due to the market already pricing in expectations of further easing measures over the next couple of years, as the Fed had telegraphed the move effectively. The Fed’s projections following the September 50 basis points cut indicated expectations for Fed Funds to decrease to approximately 3.1%-3.6% by the end of 2025 and to around 2.6%-3.6% by the end of 2026.
However, sellers failed to establish substantial new lows after this announcement. This lack of follow-through bearish pressure contributed to the formation of a falling wedge pattern, a chart formation often associated with bullish reversals. True to form, the fourth quarter has witnessed a bullish resurgence, with buyers propelling the DXY to new yearly highs.
A key event this week was the closing of the gap from last November. This gap had been the primary obstacle in halting the ongoing breakout as the week approached its close. In November of last year, the Fed began to signal a pause in rate hikes. Specifically, on November 1st, the day of the rate decision, the DXY closed at 106.88 and subsequently opened the following day at 106.50, creating a noticeable gap in price action.
This gap area came into play in April and May, with the 106.50 level acting as resistance on two separate occasions, forming a double top pattern. While this level initially slowed down the upward movement on Wednesday, buyers remained resolute, pushing for another fresh high on Thursday, ultimately resulting in a new yearly high for the DXY.
It’s worth noting that the daily chart for the DXY is beginning to exhibit RSI divergence, characterized by a lower high in the Relative Strength Index (RSI) alongside a higher high in price. This is a mirror image of the RSI divergence observed in September, which preceded the formation of the falling wedge pattern.
US Dollar Daily Price Chart
US Dollar Index daily chart showing recent price action and RSI divergence, data from Tradingview.
US Dollar Weekly Chart
Examining the weekly chart of the US Dollar Index reveals a broader context: a two-year trading range. Within this range, several strong trends have emerged but ultimately stalled around the same resistance area. Examples include the rally last summer, which lasted for 11 weeks before encountering seller resistance, and the rally in the early months of this year, which also peaked at the 106.50 level.
US Dollar Weekly Chart
US Dollar Index weekly chart illustrating the two-year range and key resistance levels, data from Tradingview.
The critical question now is whether USD bulls possess sufficient momentum to sustain the breakout. From a fundamental perspective, there is a case to be made, particularly as the FOMC is now signaling caution regarding future rate cuts. However, a more crucial factor may be the composition of the DXY itself. As a composite index, its largest component is the Euro, and the Eurozone economy faces the prospect of further rate cuts down the line from the European Central Bank (ECB). This contrast in monetary policy outlook is contributing to the pressure on the EUR/USD pair, which is currently testing range support, as we will explore further.
Within the DXY, the current two-year high is positioned at 107.35. Notably, the 107.00 level has been tested twice this week, including acting as a lower high on Thursday following comments from Federal Reserve Chair Jerome Powell. These comments introduced uncertainty regarding the December rate cut that had been largely priced into market expectations.
US Dollar Hourly Price Chart
US Dollar Index hourly chart displaying recent price fluctuations and tests of the 107.00 level, data from Tradingview.
EUR/USD: From Range Resistance to Range Support, Is 1.05 EUR USD the Next Stop?
The EUR/USD pair experienced a rapid ascent to the 1.1200 level in August. However, at this level, bullish momentum abruptly stalled. As previously discussed in market analyses, this significant figure proved to be a formidable barrier for buyers to overcome.
Now, halfway through the fourth quarter, the pair has already descended to range support at the 1.0500 handle. This level was last tested a year ago, where buyers emerged to defend the lows. For those watching the 105 eur usd mark, this level’s resilience is being put to the test once more.
EUR/USD Weekly Chart
EUR/USD weekly chart showing the descent to range support around 1.0500, data from Tradingview.
EUR/USD at a Critical Juncture
Currently, the 1.0500 level has held as support. Interestingly, this level coincides with the DXY’s test of the 107.00 level mentioned earlier, suggesting a correlation between the two currency pairs. Adding to the intrigue is the emergence of diverging RSI on the daily EUR/USD chart, with the RSI indicator now rebounding above the 30 level, often considered oversold territory.
This technical setup could pave the way for tests of lower-high resistance in the 1.0611-1.0643 zone. Beyond this zone, further resistance levels of interest include 1.0700 and the 1.0750-1.0765 area. Whether 105 eur usd will continue to hold as support or break down will likely dictate the near-term direction of the Euro-Dollar pair.
EUR/USD Daily Chart
EUR/USD daily chart illustrating RSI divergence and potential resistance zones above the 1.0500 support, data from Tradingview.
— written by James Stanley, Senior Strategist
