The US dollar jumps as the euro and the British pound stare and stocks stare into the abyss

Talking points about stocks in US dollars:

  • It’s been a rough week for risk trading and the US dollar continues to rally, now trading at its highest level in 20 years.
  • There seems to be a bit of a disconnect at the moment between the US stock markets and the global FX markets. The Euro and the British Pound are showing crash-like movements. US stocks, at least in the S&P and Nasdaq, remain above their June lows as of this writing. It looks like there will be some realignment in risk trends before too long.
  • The analysis in the article is based on price movement And the chart formations. To learn more about price action or chart patterns, check out DailyFX Education Section.

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We are nearing the end of a rough week for risk trading and there have been a number of central banks reporting interest rate increases, with a potentially worrisome topic emerging.

The UK raised interest rates by 50 basis points yesterday, and sterling responded by dropping to a 37-year low. And then, the unveiling of the UK budget this morning doesn’t seem to help matters much, as the energy support program and tax cuts only helped push the Pound to another low against the US Dollar.

At this point, the US dollar is the main driver as it pushed the currency to a new high in 20 years. From the monthly chart we can see a massive move in September as prices made a decisive break above the 110.00 psychological level.

US dollar monthly chart

Chart created by James Stanley; USD, DXY on TradingView


This was a big driver for the USD and what happened in the Euro this week is worrying. I looked at this on Monday, and lined up about the level of parity that continued to play a role in this matter.

But by Tuesday, support was looking weak ahead of the FOMC meeting and I talked about that in the report published that day. The price has since collapsed to a 19-year low, invalidating a falling wedge formation along the way.

As for the next support – there is an interesting element around the .9600 level, as this was the previous swing high turned low swing back in 2002.

EUR/USD monthly chart


Chart created by James Stanley; EURUSD on Tradingview

cable in breakdown area

Unfortunately, there is no similar context in GBP/USD as the price is trading at 37-year lows. I had looked at the scenarios for the pair to continue falling yesterday on a short-term basis but a similar approach seems inappropriate today after such a long move.

The big hopeful element here is that the psychological level of 1.1000 helps stop the bleeding for a short time. The RSI has been oversold since 2009 and while this is not a timing indicator, it does highlight the risk of selling at this point below the 1.1000 level, which could result in little to no pause or bounce for that matter.

GBP/USD monthly chart


Chart created by James Stanley; GBPUSD on Tradingview


Stocks are in a tight spot, but given what we looked at above, with both the Euro and the Pound in the midst of crash-like moves, the fact that the S&P 500 didn’t even test the June low seems like a mismatch. .

I had a look at the upcoming US stocks this week, with bearish expectations after last week’s formation of bearish engulfing formations on the weekly charts. The June drop in the S&P 500 looks weak.

The bigger picture – the next support for the S&P 500 could be drawn below the June low either at the psychological 3500 level – which is near the 50% mark of the pandemic move. Or about 3,400, the highest swing before the pandemic.

S&P 500 weekly price chart


Chart created by James Stanley; S&P 500 on TradingView


The Nasdaq is in the same place, just above the June lows that posted in a large spot on the chart. The next longer term support on my NASDAQ chart is at 10500 and then an area from the pre-pandemic high 9763 all the way to the psychological 10K level.

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Nasdaq weekly price chart


Chart created by James Stanley; Nasdaq 100 on TradingView

— Written by James Stanley, Chief Strategist, and Head of DailyFX Education

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