Price action in US dollars in 2021: EUR / USD, GBP / USD, USD / JPY

Discussion points about the action of the US dollar price:

• There are now less than two weeks to the end of 2020, which was a brutal period for the US dollar.
• Do USD bulls have hope for 2021?
• The analysis contained in the article is based on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

With less than two weeks to go until 2021, markets appear prepared for continued volatility in the new year, as a number of relevant factors remain. Probably one of the most noticeable exchange rate trends of 2020 was the weakness of the dollar. The US currency gained strength as the pandemic was quoted during the negotiations in late February and early March. But it did not last long, as a busy FOMC helped to calm investor fears, with US stocks showing a significant recovery from March 23rd low.

And for the rest of the year, risky assets remained strong and supported, as the US dollar continued to fall to new lows. The big question for foreign exchange markets before the opening of 2021 is whether the US dollar has more room to go. We have just released updated forecasts for the first quarter of 2021, and I wrote the technical part of the US dollar in this report with Mr. John Kicklighter, covering the fundamentals.

Noteworthy on the long-term chart below, the US dollar completed an evening star formation with the closing of November. Such formations are often followed with the objective of continuing to fall, after the reversal shown within the formation. It turns out that this night star also printed at the bottom of an earlier uptrend line (inflection highlighted in green).

To read more about night star patterns, Check out DailyFX Education

US dollar monthly price chart

Chart prepared by James Stanley; USD, DXY in Tradingview

In the chart above, there is a large possible support area lurking below, around the price of 88.26 on DXY. This is the 50% mark of the big move from 2011-2017, and when it came into play briefly in 2018, it took the low and now functions as the two-year low on DXY.

It seems that the big key to whether or not this comes into play is the Federal Reserve and how they respond to the inflation data received. One of the major pivots of 2020 was the bank’s move to the ‘average inflation’ target, which should give the FOMC a little bit of subjectivity in rate policy if inflation starts to rise.

For read more about inflation through the Consumer Price Index (CPI), Check out DailyFX Education

With the end of the year lurking, traders should be cautious about the dollar’s short-term scenarios, as the currency has shown signs of support over the past week, as sellers may be exhausted. The psychological level of 90.00 in DXY can be especially stubborn in this final stage of the game, and the pair may need a little effort to clear some stops before sellers manage to descend towards the 88.26 point on the chart.

To learn more about psychological levels, Check out DailyFX Education

Daily price chart in US dollars: seller’s stall at 90 Big Fig

Chart prepared by James Stanley; USD, DXY at Tradingview

EUR / USD remains close to two-year highs

It was a surprisingly strong year for the euro, even as the ECB continued to increase its stimulus amid an ongoing pandemic. In EUR / USD, the strength of the euro combined with a really weak US dollar, and at this point, the parity remains perched very close to the two-year highs that were set last week.

At this point, the pair appears to be trying to keep support lower in an earlier resistance area: And this is the same resistance zone that marked the neckline of an inverse head and shoulders pattern before last week’s FOMC breakout.

This zone has already picked up a support inflection earlier this week. This support zone ranges from 1.2134 to 1.2167, each derived from long-term Fibonacci studies. A support retention in this zone keeps the door open for top strategies, but with the warning of comfort around the USD given the scenario analyzed above (and which we will discuss below a little later).

To learn more about head and shoulders patterns, join us on DailyFX Education

EUR / USD Four-hour price chart

Chart prepared by James Stanley; EUR / USD in Tradingview

Given the potential for a tightening in the US dollar at the end of the year, there may be some similar possibility of a trap on the long side of the EUR / USD.

While the current support zone has some long-term connotations and has done an impressive job of helping to define resistance (and the neckline of that reverse head and shoulders pattern); we’ve never seen EUR / USD test the psychological level of 1.2000 for support after December 1stst skirt. This level gave a strong dose of resistance in early September; and given that we have already seen some demonstration of support in the current zone, the door could be opened for a deeper bearish run in the pair looking towards that 1.2000 point for subordinate support.

EUR / USD Weekly price list:

Chart prepared by James Stanley; EUR / USD at Tradingview

GBP / USD Cable Chaos Continues at Brexit Positivity

For those looking for some volatility during the holiday, GBP / USD may have some volatility to offer. At the time this book was written, it looked like a Brexit deal was made. But for those who are not familiar with Brexit, there must be a strong dose of cynicism, as there have been numerous twists and turns in the Brexit saga over the past four years.

In GBP / USD, the hope is eternal, with the pair being tested above the 1.3500 zone. This has been a problematic area for GBP / USD as we have only had a few daily closings above this level in recent years.

GBP / USD Daily price chart: the cable meets the big fig

Chart prepared by James Stanley; GBP TO USD in Tradingview

For traders looking for volatility, the short-term chart may be more attractive. In the two-hour chart below, observe the price action expanding as the reversal to the average continued to show. If Brexit headlines continue to populate through the news flow, it could keep the currency and the pair moving.

GBP / USD Two-hour price list

Chart prepared by James Stanley; GBP TO USD in Tradingview

USD / JPY: something is going to go wrong

This is my main trading idea for next year, hoping that the USD / JPY will take a deeper look, as the price action has built a support sequence around the 103.11 Fibonacci level. The rationale here is that the bearish USD / JPY scenario could work with both risk and non-risk issues; and without Shinzo Abe in charge and with the BoJ still heavily overwhelmed on the monetary front – how much room does the BoJ have to soften or weaken the yen? I don’t anticipate that the BoJ will be able to keep up with the Fed next year, and that speaks to the pair’s short side. To get my main business idea for next year, the link below can set it up:

The technical background combines with the low post-March highs, combined with the horizontal support over the past few months at the Fibonacci level; produces a backdrop similar to a descending triangle. Often, these formations will be approached with the objective of disaggregation, looking for horizontal support to eventually give rise to the growing offer that is being offered by sellers with minimum highs bringing minimum lows.

To learn more about descending triangles, join us on DailyFX Education

Weekly price chart in USD / JPY

Chart prepared by James Stanley; USD / JPY in Tradingview

US actions in 2021

I already shared my two cents on the subject in last week’s webinar, to which you are certainly welcome. I remain optimistic for next year, although I believe that we will need a small setback at the beginning of the year, perhaps in the first quarter, but I prefer to extend this expectation until the first half.

To hear more of my views on what’s to come in 2021, check out US dollar price action in 2021: EUR / USD, USD / JPY.

And, lastly, I would like to take this opportunity to thank everyone who read or became involved with DailyFX last year. It has been a tumultuous year, to be sure, but hope and optimism populate the horizon for better days ahead. Your readers and your time are incredibly important and will never be taken for granted. Thanks.

— Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on twitter: @JStanleyFX