Are Forex Markets Ready to Retrace US Dollar Strength?

Forex markets have been extremely polarized in recent weeks as the US Dollar clobbered the other major currencies. The massive momentum behind the move has had market participants at a loss as the greenback advanced along a near-linear trajectory without significant retracement. With sentiment indicators pointing to deeply overbought conditions, the Dollar looks like it may have finally reached a near-term turning point against the major currencies.

[B]EUR/USD

Strategy: Bearish below 1.4435, Targeting 1.3860[/B]

The Euro entered this year range-bound against the US Dollar. The pair embarked on a momentous rally on 02/08 that would take it to test the 1.60 level. The selloff that began in mid-July has now fully erased these gains. The pair looks to have found near-term support at 1.4064, the 123.6% Fibonacci extension of the 02/08-04/22 ascent. Price action has yielded a Doji candlestick at support, indicative of a possible correction. A pullback to 1.4435 will present an opportunity to add to short positions or establish new ones, targeting the next leg of the bearish trend to reach July 2007 highs at 1.3860.

For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.

[B]GBP/USD

Strategy: Flat, awaiting confirmation.[/B]

The British Pound has fallen precipitously against the US Dollar. Indeed, the pair has fallen more in the last 2 months than throughout the course of 2005, the last prolonged period of dollar strength. As we noted yesterday, chasing the trend with a short at current levels is dangerous from a risk-reward perspective. Price action has now traded to a trend line in place since 2001 and shown an Inverted Hammer candlestick on the daily chart (not shown). The long-term trend bias favors bears as the interest rate outlook for 2009 calls for Sterling weakness (bond yields forecast rate hikes for the Fed and rate cuts for the Bank of England). Assuming this is indeed a near-term bottom, a corrective bounce to would meet resistance at 1.8114, the 23.6% Fibonacci retracement of the 07/15-09/08 decline.

For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.

[B]
USD/JPY

Strategy: Bearish below 107.13, Targeting 104.97[/B]

Previously, we suggested USDJPY price action had formed a Rising Wedge reversal formation confirmed by negative divergence with the Slow Stochastic oscillator. The pair validated this analysis, breaking below Wedge support and closing below 107.13, the 23.6% Fibonacci retracement of the 03/17-08/15 rally. We will go short at current levels, targeting the 38.2% mark at 104.97.

For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.

[B]USD/CHF

Strategy: Bullish above 1.1053, Target TBD[/B]

The most recent leg of the Dollar’s rally against the Swiss Franc following a break of resistance at 1.1053 appears to have lost some momentum ahead of the 1.14 level. Fundamental considerations favor the bullish scenario: Bond yield forecasts call for the Fed to raise interest rates in 2009 while the Swiss National Bank remains at 2.75%, closing the yield gap by the third quarter and tipping the balance in the greenback’s favor by the last three months of next year. We will look for a pullback to 1.1053, the 23.6% Fibonacci retracement of the 07/15-09/08 rally to establish long.

For more resources on the USDCHF, please visit the DailyFX Swiss Franc Currency Room.

[B]USD/CAD

Strategy: Flat, awaiting confirmation.[/B]

The US dollar rallied convincingly against its Canadian counterpart to break above the major range top at 1.0376. Previously, we noted that the upswing found resistance at 1.0725 and corrected lower, with current price action seeing consolidation between the 23.6% and the 38.2% Fibonacci retracements of the 07/15-08/12 rally at 1.0550 and 1.0440, respectively. We suggested going long, targeting a break above resistance to challenge the top at 1.0725. Price action validated this assessment, hitting the target to book 272 pips in profit. Price action appears to be forming a double top near 1.07, in which case the next move will be a return to support at the 23.6% level. That said, our fundamental perspective as discussed in the Q3 Quarterly Canadian Dollar Forecastcontinues to favor USDCAD strength. To that effect, we may see a breakout above resistance as the broader trend continues. We will remain on the sidelines for the time being, awaiting confirmation. Updates will be posted on the Fibonacci forum.

For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.

[B]
AUD/USD

Strategy: Flat, awaiting confirmation.[/B]

Talk of parity with the greenback has evaporated as the Australian Dollar has nose-dived from 22-year highs to lose 19% in less than 2 months. The move has fully erased the pair’s gains built up since the beginning of this year. Near-term support has been found the psychologically important 0.80 level. This hurdle is reinforced by the 138.2% Fibonacci extension of the 01/22-07/15 ascent. Although the trend firmly favors the bearish scenario, chasing the pair lower from current levels is profoundly dangerous from a risk-reward perspective. Rather, we will look for a correction higher to establish a resistance reference point and enter short. Updates will be posted on the Fibonacci forum.

For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.

[B]NZD/USD

Strategy: Flat, awaiting confirmation.[/B]

The New Zealand Dollar had led the other majors in buckling to the advance of USD bulls in July. NZDUSD has since lost 15% to date, with prices now positioned above a key supporting trend line established April 2003. Support is reinforced by the 38.2% Fibonacci retracement of the 11/2000-03/2008 multi-year rally at 0.6566. Given the magnitude of recent downward momentum, a correction higher could be quite extended, potentially rising for a re-test of the 0.70 level.

For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.

[I]To contact Ilya with comments regarding this or other articles he has authored, please email him at <[email protected]>.[/I]