special reports

US Dollar Consolidates, Bearish Correction Likely (Fibonacci Weekly)

Friday, 17 October 2008 12:04:02 GMT  |  Ilya Spivak, Currency Analyst

The decisive US dollar rally set off in mid-September is losing steam, with clear consolidation patterns across the majors poised to give way to a near-term correction before the greenback reasserts its strength.

EUR/USD

Strategy: Pending short, waiting for confirmation

Euro price action has changed gears in the past week, with the sharp bearish push giving way to consolidation in a wide range above the 1.34 level. This dynamic is repeated in most of the major pairs, suggesting it is US dollar sentiment that is dominating directional momentum. We see that the US Dollar Index, an average of the greenback's value against six major currencies, looks to have found resistance and may be ready for a near term reversal. This could see the EURUSD bounce higher form current levels, with initial resistance at 1.3907, the 23.6% Fibonacci retracement of the 07/15-10/10 decline. Depending on the velocity of the move, this could also prove to be the site of an intersection with a downward-sloping trend line that connecting recent highs. We will for this correction to offer an opportunity to enter short eyeing a return to bearish momentum.



For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.




GBP/USD

Strategy: Pending short, waiting for confirmation

While starkly similar, British Pound positioning seems a bit clearer than that of the Euro: prices have bounced higher from support at the lower boundary of a channel that has contained the pair since June to find initial resistance at 1.7560, the 23.6% Fibonacci retracement of the 07/15-10/10 down move. We will look for acceleration in bullish momentum to yield a test of the channel top, offering a short entry opportunity.



For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.




USD/JPY

Strategy: Flat.

The Yen’s tendency to reflect the trends in market risk sentiment has made for some very erratic price swings in recent days. Although intraday volatility has certainly been tremendous, USDJPY still looks in line with the consolidation theme running through most of the US Dollar pairings. That said, indentifying a firm directional bias has become elusive at this point as the credit crunch begins to fade from view and economic fundamentals retake the spotlight. We see two possible scenarios emerge: the Yen could stand to lose because the Japanese economy’s dependence on foreign demand means it will suffer a great deal in the coming months as global growth slows in unison; Alternatively, the very same global slowdown could pressure stock markets lower and drive the Yen higher as risk appetite declines. As it stands, we will remain on the sidelines as we wait for the market chooses the path of least resistance.



For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.




USD/CHF

Strategy: Pending long, awaiting confirmation.

The Swiss Franc pairing is not exception to the theme running across the majors: having tested 1.15, bullish momentum has given way to consolidation above 1.1270, the 14.6% Fibonacci retracement of the 07/15-10/06 ascent. With this pair exhibiting a whopping -98% inverse correlation to EURUSD, our approach is reasonably a mirror image of the Euro strategy. We will look for a down swing to test support near the intersection of the 23.6% Fib (1.1139) and the bullish trend line connecting recent lows to offer a long entry opportunity.



For more resources on the USDCHF, please visit the DailyFX Swiss Franc Currency Room.




USD/CAD

Strategy: Flat.

Canadian dollar positioning is clearly diverging from that of the other major pairs. While we are seeing clearly defined consolidation patters elsewhere, USDCAD looks far more erratic. This seems to owe to the unexpectedly close 82% correlation between USDCAD and the VIX Index gauge of market volatility. The pair’s momentous rally has apparently started to slow, with initial support at 1.1698, the 23.6% Fibonacci retracement of the 09/26-10/10 rise. We will remain on the sidelines for the time being, waiting for price action to yield more clarity.



For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.




AUD/USD

Strategy: Pending short, waiting for confirmation

Although its consolidation range is far wider at close to 800 pips, the Australian Dollar is positioned in a near-identical setup to that of the Euro. We see the broad US dollar reversal make its mark here as well, with a test of the 0.75 level well within the realm of possibility in the near term before the bears regain the upper hand. Initial resistance is seen at 0.7232, the 38.2% Fibonacci retracement of the 09/22-10/08 decline.



For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.




NZD/USD

Strategy: Pending short, waiting for confirmation.

Having hit a low at 0.5785, the New Zealand dollar has spend the past week or so consolidating below 0.6248, the 23.6% Fibonacci retracement of the 07/15-10/08 decline. With a bottom thereby established and the USD Index signaling the likelihood of a reversal away from dollar strength, we see potential for NZDUSD to breach near-term resistance for a test of the downward-sloping trend line connecting the highs of the aforementioned down swing. We will treat this as an opportunity to enter short as bearish momentum reasserts its dominance.



For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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