Talking Points:
- Dollar finds major support from two different angles
- At the least, higher in the near-term most likely
- Selling USD-based pairs – EUR/USD, GBP/USD look like good ways to play
Last week brought some much desired fireworks to the FX market, creating a few interesting scenarios. There was a lot of chatter surrounding the breakout, fake out in the Euro, caused by Draghi and Co. The Euro went from a bullish breakout to a bearish breakdown in one fell swoop.
The Euro wasn’t the only one to get rejected at new highs, I’m looking at you Cable (GBP/USD). Both the Euro and Cable are trading near major long-term levels: 1.4000 EUR/USD (by a 6-year trend-line from 2008 highs) and 1.7000 GBPUSD (the level goes back to 2009, 2005, even the late ‘90s).
GBPUSD/EURUSD – Monthly
Charts created by Paul Robinson using MarketScope 2.0.
This brings into my crosshairs the Dollar Indices – $USDOLLAR (DJ FXCM Dollar Index) and $DXY (Ice U.S. Dollar Index). $USDOLLAR had a weekly reversal off 1-year horizontal support as well as a trend-line extending back to August of 2011. This confluence makes 10370/55 a critical area. A descending trend-line back to July of 2013 then crossing over the January highs is creating a massive triangle.
$USDOLLAR – Weekly
There are three scenarios of which one will likely play out:
1. The Dollar continues wedging itself for a while longer into a tightly coiled triangle, set to break out one way or another a little later in the year. (Short-term move would be higher.)
2. It gathers momentum in the near future and barrels right through the descending trend-line with little pause.
3. The low last week turns out to just be a minor bounce off support and the trend lower in the Dollar resumes shortly with EUR and GBP set-backs turning out to only be minor bumps in the road.
It seems at this point the first two scenarios are most likely, so I will play it out as follows. Initially give last week’s lows the benefit of the doubt and look for bearish set-ups in USD based pairs – right now, namely – EUR/USD and GBP/USD and their respective crosses. I am curious to see how USD/JPY responds to a broad Dollar rally. If we go into any type of real ‘risk-off’ mode, then USD/JPY will likely sell-off while strength in the Dollar is exhibited elsewhere. So, for now, I will focus my efforts on set-ups which have a bullish bias.
–Written by Paul Robinson of FXSimplified.com