Earlier today, the U.S. dollar climbed to a fresh 3-week high against its Canadian counterpart after the Bank of Canada left its overnight cash rate unchanged at 1%. Thanks to this news USD/CAD reached an important resistance line. Will it stop the rally?
In our opinion the following forex trading positions are justified - summary:
- EUR/USD: short (stop-loss order: 1.3670)
- GBP/USD: none
- USD/JPY: none
- USD/CAD: none
- USD/CHF: none
- AUD/USD: none
EUR/USD
Although EUR/USD still remains in the consolidation below the long-term resistance line, the medium-term outlook has deteriorated as the exchange rate declined to the lower border of the formation. As you see on the weekly chart, this area is reinforced by the 38.2% Fibonacci retracement and the June and February lows. If this strong support zone withstand the selling pressure, we’ll see another attempt to break above the upper border of the consolidation and the long-term resistance line (similarly to what we saw at the beginning and also in mid-June). However, if currency bulls fail and the pair moves lower, we may see a drop even to around 1.3320, where the size of the downswing will correspond to the height of the consolidation.
Once we discussed the medium-term outlook, let’s check what can we infer from the daily chart.
Looking at the above chart, we see that EUR/USD extended declines below the neck line of the head and shoulders reversal formation. So far, the size of the downswing corresponds to the height of the consolidation (marked with blue). However, taking into account the fact that the bearish formation is underway, we are still convinced that our last Wednesday’s commentary on this currency pair is still up-to-date:
(…) we’ll see a correction to the neck line based on the June 26 and July 7 lows (but further deterioration will be even more likely if the pair drops below the green support zone). If this area is broken, the exchange rate will test the strength of the June lows, where the size of a downswing will correspond to the height of the formation.
Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: bearish
LT outlook: bearish
Trading position (short-term): Opening small short position (using half of the capital that one would normally use) seems justified from the risk/reward perspective. We will likely double the size of the short position once we see the EUR/USD below the Feb 2014 low, as this breakdown will serve as a bearish confirmation. Stop-loss order: 1.3670. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
USD/CAD
On Friday, we wrote the following:
(…) the initial upside target for currency bulls will be around 1.0773, where the 23.6% Fibonacci retracement (based on the entire March-July decline) is. If it is broken, the next target will be the upper line of the declining wedge (currently around 1.0811).
Yesterday, we added:
(…) we should keep in mind that the CCI and Stochastic Oscillator are overbought (additionally, there is a negative divergence between the CCI and the exchange rate), which suggests that the space for gains might be limited and a pause or correction is just around the corner.
Looking at the above chart, we see that currency bears realized their pro-growth scenario as the exchange rate climbed to the upper line of the declining wedge. Despite earlier improvement, this strong resistance line in combination with the position of the indicators triggered a pullback, which took the pair below the previously-broken 23.6% Fibonacci retracement. Although the situation hasn’t deteriorated significantly (the exchange rate is still trading above the lower border of the declining wedge), it seems to us that as long as there is no breakout above the upper brown resistance line, we won’t see further improvement. On top of that, if indicators generate sell signals, we’ll likely see a breakdown not only below the major support line, but also a re-test of the strength of the long-term green support line.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
AUD/USD
The medium-term outlook remains mixed as AUD/USD is still trading in a consolidation between the May lows and the April high. Today, we’ll take a closer look at the daily chart.
Quoting our previous Forex Trading Alert:
(…) AUD/USD declined below its key support line, which triggered a pullback below the lower border of the consolidation (marked with blue). This is a bearish signal, therefore (…), we think that the current correction will accelerate and we’ll see a drop to the July low of 0.9327 or even to the declining red support line (currently around 0.9316).
From this perspective, we see that the situation developed in line with our last commentary as the exchange rate reached its first downside target. As you see on the above chart, the support level in combination with the 61.8% Fibonacci retracement triggered a corrective upswing that took the pair above yesterday’s low. This is a positive signal, which suggests that if currency bulls do not give up we’ll see an increase to the previously-broken green support line. Nevertheless, we should keep in mind that as long as AUD/USD is trading below its key support/resistance line, another test of the strength of the support zone can’t be ruled out.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bearish
Trading position (short-term): In our opinion, no positions are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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