Weekly Review and Outlook: Forex Markets in an Highly Uncertain State after a Violent Week
By ActionForex
The forex markets are in a highly uncertain state after all the violent moves seen last week. Dollar is weak without a doubt when you saw the dollar index dropping more than 7% from 83.64 to intra week low of 77.69 after Fed cut the federal fund rates more than expected to a target range of 0-0.25% and formally entered into quantitative easing. But is it that weak? We doubt so as GBP/USD, AUD/USD, USD/CAD are still kept in range while the USD/JPY was just mildly lower.
The weakness of dollar was mainly manifested in strength in Euro and Swiss Franc which saw both currencies surging across the board. Euro was boosted by ECB’s comments that suggested it will pause the rate cut cycle in Jan to wait-and-see the effect of prior rate cuts first. EUR/GBP accelerated to a record high of 0.9554. EUR/CAD took out key resistance at 1.7 and reached as high as 1.7499 while EUR/AUD is also back pressing 2.1126 high. EUR/JPY did rebounded strongly and breached 131 level briefly. But is the common currency really that strong? Yes against Sterling and commodity currencies, but in doubt against dollar, yen and swissy.
Euro gave back much gains after ECB announced to widen the so called rate corridor and that’s viewed as intended to discourage banks from parking money with the ECB. After all, EUR/JPY is still bounded in range of 113.63 and 131.03 and there is no change to the view that it’s merely in consolidation. More importantly, such consolidation could have ended at 131.03. EUR/CHF, only other hand, as mentioned during the week, reversed after hitting an important resistance level and could have peaked at 1.5880. EUR/USD’s rally, though strong, was still limited by 1.4867 structural resistance.
What about the yen? Markets had little reaction to BoJ’s rate cut to 0.1%. Despite all the intervention talk, the Japanese currency was just mixed. GBP/JPY even managed to take out prior low of 133.09 during the week while USD/JPY’s rebound clearly lacked momentum. EUR/JPY retreated sharply after hitting 131.03 on initial strength.
After all, the markets are in a highly uncertain state and here are some points to note for the rest of the year and probably in early Jan too to clear out the messy picture.
1. Dollar index’s sharp decline from 88.46 was supported by mentioned 61.8% retracement of 71.31 to 88.46 at 77.86, inside key support zone of 75.88 and 80.38. Based on the fact that most dollar pairs are still viewed as in consolidation, we favor the case that such fall is merely a correction in the larger up trend only. To solidify this case, we’d like to see the dollar index breaks 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) without making a new low below 77.69. That will significantly increase the odds that fall from 88.46 to 77.69 is in corrective 3 wave structure and thus, retain the long term bullish scenario. Ideally, the break of 83.11 should be accompanied by at least a retest of 1.4466 in GBP/USD, 1.3015 in USD/CAD and 0.6008 in AUD/USD.
2. However, failure below 83.11, followed by a break of 77.69 will argue that fall from 88.46 is impulsive in nature. If accompanied by a break of 1.4867 in EUR/USD, that will suggest that the greenback’s trend has totally reversed and it’s indeed developing another long term down trend.
3. So far, we’re still favoring the case that EUR/USD’s rise is merely a corrective rebound. A break of 1.3629 support will add much credence to this case. Meanwhile, attention will also be paid to 118.07 in EUR/JPY as well as 1.5163 in EUR/CHF and break of which will add much doubts to Euro’s general strength.
4. Again 118.07 in EUR/JPY will be an important level for yen traders. Break of which will significantly increase the chance then yen in staging another round of massive rally.
5. 1.5163 in EUR/CHF will also be important in a way that even if Euro could maintain strength in generally, break of this support will argue that the focus is indeed shifting from Euro to the Swissy.
