We’re seeing quite a mixture of signals across forex majors, which implies the US dollar could perform well against some currencies but not all. AUD/USD and USD/CAD look vulnerable to USD strengthen, whereas EUR/USD has some key support level propping it up.
By :Matt Simpson, Market Analyst
With an FOMC looming, forex markets are unlikely to break out with any sort of conviction without a fresh catalyst. The general lack of direction can be clearly seen on the US dollar index chart, but I’m hopeful that Wednesday’s FOMC meting or Friday’s nonfarm payroll report can fix that.
I suspect that the FOMC meeting will not be as dovish as current market pricing suggests, and as they released their dot plot and staff forecasts in December we will have to rely on the statement or press conference for any policy clues. And if recent Fed comments are anything to go by, the Fed are unlikely to release a dove into the crowd - and that risks a bounce for the US dollar and yields.
But not all major forex pairs are aligning in such a way that suggest a strong directional move for the US dollar index is near. Potential bear flags are forming on AUD/USD, NZD/USD and CHF/USD (or a bull flag on USD/CHF) which points to dollar strength. Yet EUR/USD is holding above its 200-day EMA with a potential bullish reversal candle. And as the euro currency has a ~57% weighing for the US dollar, it suggests upside potential for the US dollar index could be limited despite bear flags forming on AUD, NZD and CHF. And with with the BOJ stuck in ultra-dove mode and the Fed unlikely to join them, USD/JPY looks ripe for a bullish breakout and run for 150, whilst prices hold above 146.
EUR/USD technical analysis:
A closer look at the EUR/USD daily spot chart shows a bullish hammer formed on Monday, with a false break and eventual daily close above the 200-day EMA. A HVN (high-volume node) also sits just beneath 1.08 and a bullish divergence is forming, so the odds appear to favour a bounce from current levels.
The 1-week implied volatility band hints at a move above 1.09 and last week’s high, a break above which confirms the falling wedge pattern and projects a target back near the cycle highs above 1.11. I should add that a run back to the highs is not my preferred bias, as that would require a significant shift form the Fed – and I just do not see that happening with such strong employment data. Therefore, any failed rally towards 1.09 could pique my bearish interest, especially if the Fed are not as dovish as hoped.
AUD/USD technical analysis:
A potential bear flag is forming on the AUD/USD daily chart beneath its 200-day EMA. I had previously been looking to fade into moves up to last week’s high, due to the series if 1-day bearish reversal candles which had formed below the 200-day EMA. Yet Monday’s bullish engulfing candle suggests the market wants to recycle at least slightly higher.
If upside momentum is capped and prices remain within the approximate bear flag, then I would reconsider the bearish move towards 0.6500. Although the bear flag itself suggests 0.6400 as a potential target. However, a break or daily close above the 200-day EMA suggests further upside and brings the high-volume node (HVN) around 0.6700 into focus, at which point I would then reassess its potential for a swing high to form.
USD/CAD technical analysis:
A double top formed on USD/CAD at the 50% retracement level. And looking back, 50% seems to be a level USD/CAD responds well to. RSI (2) is approaching oversold, so perhaps a swing low is close. I also not that a 50% retracement level sits near the HVN (high-volume node) of the prior leg higher, so I am now looking for a retracement towards 1.3355 and evidence of a swing low for a long setup.
– Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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