US Dollar Starts Q4 at Two-Year-Highs: Can USD Bulls Maintain?

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US Dollar Talking Points:

  • The US Dollar finished September and Q3 with a push of strength that perches the currency up to fresh two-year-highs.
  • This strength remained despite two rate cuts from the Fed, the first such moderation out of the bank since the Financial Collapse. Will the Fed continue to cut in Q4? Markets are currently showing 65% chance of at least one more rate cut by the end of the year (per CME Fedwatch).
  • DailyFX Forecasts are published on a variety of markets such as the US Dollar or the Euro and 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.

The third quarter closed with a bang in the Greenback as the currency surged in its final month and, more specifically, the final week of the final month to set a fresh two-year-high. The month of July was particularly strong and buyers held the bid through August and early-September. During this time, the Fed cut rates twice, the first moderation from the bank since the 2008 Financial Collapse, but this seemed to matter little as a fresh QE package from the Euro-zone was announced to go along with very dovish postures at pretty much every large Central Bank around-the-world.

Coming into Q4 the US Dollar is nearing some very interesting resistance with the 100 level on DXY clearly in-sight.

US Dollar Monthly Price Chart

Chart prepared by James Stanley; US Dollar on Tradingview

Getting a bit closer on the chart and Daily RSI is currently showing as overbought following this late-quarter rally. This can make the prospect of chasing, particularly considering the nearby resistance, a challenging scenario.

US Dollar Daily Price Chart

us dollar daily price chart

Chart prepared by James Stanley; US Dollar on Tradingview

Fed in the Spotlight for October Rate Decision

That bullish move in the USD through Q3 showed in an almost begrudging manner and, as mentioned earlier, took place amidst a backdrop in which the Federal Reserve cut rates twice during Q3. These were the first such moves since the Financial Collapse but they were so widely-telegraphed that few traders were actually surprised by the moves. Thickening the drama, the Fed, at this point, has refused to highlight any future cuts or moderation, instead chalking up these two most recent moves as ‘mid cycle adjustments.’

This begs the question as to whether another outlay sits in front of us that resembles Q4 of last year, when in the opening days of the new quarter, Chair Powell came off considerably more-hawkish than what market participants were looking for. This led to a quarter of pain on the charts as S&P 500 futures moved down by as much as 20%, finally catching a bid on Christmas Eve that carried price action higher through April trade.

At this point, the S&P 500 remains in a tepid spot after failing to push up to fresh highs after the most recent rate cut. Given the considerable Fed-speak that remains on this week’s economic calendar, this theme could certainly see some interest this week and as the October rate decision approaches at the end of October.

S&P 500 Four-Hour Price Chart

spx500 four hour price chart

Chart prepared by James Stanley; SPX500 on Tradingview

Which Other Currencies for Strength?

One of the primary complications with strategies around USD-weakness at the moment is the simple dearth of attractive pairing options. Europe has an incoming stimulus program, and the Bank of Japan appears happy to continue with their own loosening strategies, meaning two of the largest currencies in the world are being actively-backed by regimes of weakness. The US Dollar, however, is being represented by a Federal Reserve that seems to want to store some dry powder in the event that they have to get more active down-the-road.

One potential option for USD-weakness is USD/CAD. The Canadian Dollar had a rollercoaster Q3 and, at this point, CAD-strength continues to show some potential in the pair. The BoC has yet to talk up rate cuts or softening, putting them as one of the lone Central Banks that is and has been standing pat. If a bearish reversal does develop in the US Dollar, USD/CAD can remain as one of the more attractive spots to look for that weakness to price-in.

USD/CAD Four-Hour Price Chart

usdcad four hour price chart

Chart prepared by James Stanley; USDCAD on Tradingview

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or 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 an abundance 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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