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Dollar On The Verge Of Bullish Breakouts Against The Euro And Pound

Friday, 02 January 2009 17:20:11 GMT  |  John Kicklighter, Currency Analyst

For the final session of an overall illiquid week of trading, EURUSD will keep significant technical levels in place. However, in the process, the market’s most liquid pair is building the pressure for a breakout early next week. Congestion over the past three weeks has clearly taken on the bias of a descending wedge formation, which could bring a permanent end to the sharp December reversal.

For the final session of an overall illiquid week of trading, EURUSD will keep significant technical levels in place. However, in the process, the market’s most liquid pair is building the pressure for a breakout early next week. Congestion over the past three weeks has clearly taken on the bias of a descending wedge formation, which could bring a permanent end to the sharp December reversal. Of particularly interest next week is the 38.2% Fib retracement pulled from the October 27th December 18th bull wave at 1.3825. Having already proven itself a notable level, a break here would lead bears to target a push to October lows at 1.2325. Alternatively, bullish breech would merely relieve pressure in this short-term wedge; but it would not necessary alter the developing bias and would further develop a wider range.

Are we seeing the first signs of a major break from trend in USDJPY? Though liquidity is still very thin and volatility is relatively strained, the dollar’s advance has nonetheless pushed this pair outside of the 91.25 to 89.85 range that has defined price action for much of the past two weeks. More importantly, this rise threatens the consistent falling trendline that has guided highs since September. Looking at the depth of the market today and rapidly approaching weekend, there is little chance that we will see a major push on breakout concerns today. However, a close above this technical level could be a catalyst for a New Year reversal next Monday. Technical levels are never precise though, so the development of momentum on next week’s open is more important than just daily bar closes. 

GBPUSD Congestion has held out through the end of the week. A quick rally through the thin trading conditions on Thursday was quickly snuffed out by the market today, suggesting the short-term bearish bias behind the pair is more invasive than bulls may have thought. Looking ahead to next week and beyond, the trend is clearly defined - long, medium and short-term. For immediate levels, the falling swing lows from the past two months sets a relatively flat floor for breakout traders to gather momentum should there be a quick move below 1.4350/00. Looking back eight to ten years, we can see that there are defining levels of support down around 1.40 and 1.3685 – which will be long-term bears’ next target. Alternatively, even if this pair does break pace, a rebound would still fit within the larger decline until the mid-December swing high is overtaken.

The USDCHF’s December bear trend is bleeding momentum – adding weight to the possibility of a more aggressive reversal next week. Daily lows are still slowly rising from the December 29th swing low and highs have subsequent broken the short-term downtrend that was feeding the second wave of declines after the momentum through the first two week’s gave out on the 18th of last month. As a dominant technical level, the rising trend from March lows will act as bulls’ jumping point. For a larger retracement of the nearly 1,900-point decline last month to find its footing, the market will look to confirm its short-term trend break by rising back above the 10-day SMA - and more importantly the 200-day SMA.

Despite a rise in volatility through Friday, USDCAD technical congestion looks to hold its place through the week’s end. This morning, the Canadian dollar rallied across the board, with notable breakouts in a few notable crosses (like CADJPY and EURCAD). However, without market depth to feed the loonie buying in these associated pairs in breakout follow through, there is little chance that this major will be capable of forcing such a significant technical level. Next week is a different story though. Near-term support is the 1.2060 floor on the past two weeks’ congestion band, though real interest is in the rising trend from the mid-October. Should congestion hold through the opening days of the new week, the 1.2375 to 1.2060 range will continue to build pressure for the eventual breakout.

Though a bullish push on low liquidity would not push AUDUSD to new highs, price action through the end of the week has nonetheless contributed to a bigger technical pattern behind the pair. With today’s rejected highs, it is becoming clearer that there is clear interest in the ascending wedge that has was initially just a concise bull, trend channel from late November. Momentum is siding with the bulls for an eventual breakout; but it is important to remember that this pair has not even retraced a third of its initial drop from July to October; so confirmation is still important. A break of the rising trendline and drop below 0.6750 would negate the bullish bias and build upon a wide range.

Momentum is still siding with a gradual bullish reversal for NZDUSD, but technicals behind this pair are certainly less pressing than those found in AUDUSD. The Rising trend from the early December swing low will continue to play out next week; but the impetus for any sudden drives will come from dollar buying behind the breakout of other major pairs or perhaps from a drop from NZDUSD below its trendline. At this point, there is little impetus for the development of any new, primary trends. A short-term upside breakout above 0.5865/90 would then have to deal with the 50.0% Fibonacci retracement (of the September 22nd to November 20th bear leg) at 0.6075. Alternatively, a drop below the rising trendline would fill in a broad gap in technical influence, but would ultimately just be cutting a wider range for the kiwi.

 

We always appreciate feedback from our readers. Please send emails to Jkicklighter@fxcm.com.

 

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