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Price Action Strategy for Short-Side USDJPY Continuation

Price Action, Swing & Short Term Trade Setups

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Talking Points:

- One of the strongest trends thus far in 2016 (USD-weakness) continues to see retracement. But with heavy US data on the docket for the remainder of this week, this may not last long. We go over the technical setup in USD to highlight what traders can watch for to look for the continuation move.

- We focus in on USD/JPY to investigate price action strategy. This is likely one of the more attractive pairs to play continued USD-weakness, but price action is still incredibly oversold after the outsized run that the pair has put in thus far on the year. We look at two different ways to approach this market (inside and outside price action).

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

One of the more pertinent themes across markets at the moment is the volatility being seen in the US Dollar. As the Fed shifted focus away from the four rate hikes that were expected by the bank in 2016, traders have sold out of the Greenback as rate expectations have continued to dwindle lower. The starting point for this theme was around February 11th, which was day two of Ms. Yellen’s twice-annual testimony in front of Congress. Like a light switch, market tonality went from aggressively ‘risk off,’ and back to ‘risk on.’ Since then, each Fed meeting has only fed (pun intended) more weakness into USD as the bank’s taken on progressively more dovish leanings.

We looked at this theme yesterday as the Dollar was finally putting in some element of strength. But the bigger question was how long it might last; especially given the heavy US data due to come out during the remainder of the week (Non-Farm Payrolls is on Friday). In yesterday’s article, we looked at setups in both AUD/USD and EUR/USD; but today we’re going to take that a step further by looking at five different USD-pairs to plot how traders might be able to approach each moving forward.

Below, we look at the Dow Jones FXCM Dollar Index, and on the right side of the chart are the same resistance zones we identified in yesterday’s article. Specifically, the level at 11,787 has become workable over the past 24 hours as price action broke up to this prior level of support, and attempted to find resistance although that didn’t hold. Now, on the 4-hour chart below, we can see where this level is now showing as short-term support. We’ve also seen quite a bit of indecisive price action here, which could be indicative of a turn; we just don’t have enough evidence yet to indicate that to be the case. NFP could provide that evidence, if we don’t get it sooner.

Price Action Strategy for Short-Side USDJPY Continuation

Created with Marketscope/Trading Station II; prepared by James Stanley

USD/JPY

This is probably one of the more attractive venues to voice this recent theme of USD-weakness. After the Bank of Japan held policy in April, the bears came back to sell USD/JPY with aggression. As we’ve been saying for a while now, the Yen remains one of the world’s most attractive safe haven currencies as the Bank of Japan is likely in the least flexible position of the major Central Banks. Buying stocks with QE, as they did starting with their surprise Halloween announcement in 2014; or moving to negative rates in another surprise announcement this January has done nothing to turn the deflationary tides for Japan, and at this point it’s difficult to imagine what in the Neo-Keynesian spectrum of economics might be able to actually, finally do that.

The Yen is still working around a key support level at 106.64, which is the 61.8% Fibonacci retracement of the bull market run in USD/JPY (taking the 2011 low to the 2015 high). After making a quick move towards the 105.00 psychological level yesterday, price action has snapped back and resistance has begun to show around this Fib level.

But if we go down to the 4-hour chart, we’ll see that price action has begun to work on a higher-high (around the 107.50 psychological level), and what could be a ‘higher-low’ around 106.25. So, the potential for a continued retracement higher is still looking likely, and this will be the case until a lower-low actually prints.

This means that traders can look at re-entry in one of two ways: Either we can wait for a deeper resistance level, such as re-test of prior support at 107.60; in order to play the short-term reversal (of the retracement), in terms of the longer-term trend. Or let price action break this short-term low to prove that the down-trend may be on its way back; at which point we can look to sell resistance at this 106.64 level.

While neither of these methods will ensure of catching the swing, they can both help to moderate risk outlay on each attempt (if you want to learn more about risk management, check out our Traits of Successful Traders research).

Price Action Strategy for Short-Side USDJPY Continuation

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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Risk FX Souring Quickly Ahead of Key US Data, Fed Speakers

News events, market reactions, and macro trends.

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Talking Points:

- EUR/USD off to the races - doubtful ECB stays quiet for long.

- EUR & JPY moves with AUD & GBP lower looks like trouble.

- Higher volatility in FX markets should have implications for your trading strategies.

Ahead of the US cash equity open on Tuesday, risk assets around the world are taking a dive lower: equities in Asia and Europe; US equity futures; energy commodities and precious metals; and higher yielding FX currencies.

Of particular note, the components of the USDOLLAR Index are diverging in a manner highlighting the risk-off nature of the market: the Euro and the Japanese Yen have gained; the British Pound has reversed its gains, with GBP/USD working on a hanging man candlestick; and the Australian Dollar has slid sharply after the RBA's rate cut, with AUD/USD working on a bearish outside engulfing bar.

The real question is: does any of the price action at the beginning of this week actually matter? That's a difficult question to pose during a time of heightened market stress - almost indicating that I'm ignoring incoming information while holding out for a rosier outcome. Yet my doubt lies not in my book, but rather in the upcoming slate of events on the economic calendar.

While today is somewhat quiet - there are two Fed speakers today, Mester and Lockhart - the calendar picks up in a major way from Wednesday through Friday that could easily shake out current market positioning. Tomorrow, for example, will reveal secondary labor market indicators like the ADP Employment Change report and the ISM Services Employment sub-index, which have predictive implications for Friday's April US Nonfarm Payrolls report.

It's not difficult to imagine a slew of data and Fed speakers the next few days that culminates with market participants becoming overly concerned about the Federal Reserve hiking rates in June. By dragging forward rate expectations and pushing up pressure on the US Dollar, the Fed could be threatening to hike rates just as market sentiment has started to sour. Déjà vu?

See the above video for technical considerations in EUR/USD, USD/JPY, Gold, Silver, Crude Oil, the US S&P500, and the USDOLLAR Index.

Read more: USDOLLAR at Support as Euro, Yen, and Gold Prices Near Major Levels

If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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US Dollar at Risk on Soft Data But Risk Aversion May Cap Losses

Fundamental analysis, economic and market themes

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Talking Points:

  • NZ Dollar falls with Asian shares, Yen retreats from 19-month high
  • Soft ISM, ADP figures may weigh against Fed rate hike speculation
  • S&P 500 futures hint risk aversion may limit US Dollar weakness

The Japanese Yen and the New Zealand Dollar faced selling pressure in overnight trade. The sentiment-sensitive Kiwi tracked Asian share prices lower, tipping risk aversion as the catalyst behind the move. The Australian Dollar managed to hold up better than its New Zealand counterpart, trading little-changed as corrective flows after yesterday’s sharp post-RBA selloff helped offset risk-off pressure.

Meanwhile, the Yen’s losses appeared to reflect a retracement after the currency hit a 19-month high yesterday. The typically anti-risk currency may have managed to diverge from sentiment trends with Japanese markets closed for a holiday.

Looking ahead, a relatively quiet economic calendar in European trading hours is likely to see investors looking ahead to US news-flow. An estimate of payrolls growth from ADP and April’s ISM Non-manufacturing Composite gauge take top billing.

The former is expected to show the economy added 195,000 private sector jobs in April, marking a bit of a slowdown from the 200k gain recorded in the prior month. The latter is projected to reveal that the pace of service-sector activity growth accelerated to the fastest in four months.

US data outcomes have increasingly underperformed relative to consensus forecasts in recent months, opening the door for disappointments. Such outcomes may inform pre-positioning ahead of Friday’s much-anticipated release of official employment figures, weighing on the US Dollar as traders bet that soft data will scatter chances for a Fed rate hike next month.

Continued risk aversion may offer a lifeline to the greenback however. The benchmark unit reclaimed its safe-haven credentials yesterday, pushing broadly higher against the majors as stocks declined. S&P 500 futures are pointing meaningfully lower overnight, warning that more of the same may cap data-inspired USD weakness.

Are markets matching DailyFX analysts’ 2Q forecasts? Find out here!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Unemployment Rate (1Q)

5.7%

5.5%

5.4%

22:45

NZD

Employment Change (QoQ) (1Q)

1.2%

0.6%

1.0%

22:45

NZD

Employment Change (YoY) (1Q)

2.0%

1.3%

1.4%

22:45

NZD

Participation Rate (1Q)

69.0%

68.6%

68.5%

22:45

NZD

Pvt Wages Ex Overtime (QoQ) (1Q)

0.4%

0.3%

0.4%

22:45

NZD

Pvt Wages Inc Overtime (QoQ) (1Q)

0.4%

0.3%

0.4%

22:45

NZD

Average Hourly Earnings (QoQ) (1Q)

0.3%

0.5%

0.2%

23:00

USD

Fed's Lockhart Speaks to World Affairs Council

-

-

-

23:01

GBP

BRC Shop Price Index (YoY) (APR)

-1.7%

-1.7%

-1.7%

23:30

AUD

AiG Perf of Services Index (APR)

49.7

-

49.5

0:00

NZD

QV House Prices (YoY) (APR)

12.0%

-

11.4%

1:00

NZD

ANZ Commodity Price (APR)

-0.8%

-

-1.3%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

CHF

UBS Real Estate Bubble Index (1Q)

-

1.41

Low

6:45

EUR

France Trade Balance (MAR)

-4200m

-5177m

Low

6:45

EUR

France Current Account Balance (MAR)

-

-3.9b

Low

7:45

EUR

Markit/ADACI Italy Services PMI (APR)

51.9

51.2

Low

7:45

EUR

Markit/ADACI Italy Composite PMI (APR)

-

52.4

Low

7:50

EUR

Markit France Services PMI (APR F)

50.8

50.8

Low

7:50

EUR

Markit France Composite PMI (APR F)

50.5

50.5

Low

7:55

EUR

Markit Germany Services PMI (APR F)

54.6

54.6

Medium

7:55

EUR

Markit/BME Germany Composite PMI (APR F)

53.8

53.8

Medium

8:00

EUR

Markit Eurozone Services PMI (APR F)

53.2

53.2

Medium

8:00

EUR

Markit Eurozone Composite PMI (APR F)

53.0

53.0

Medium

8:30

GBP

Markit/CIPS UK Construction PMI (APR)

54.0

54.2

Medium

9:00

EUR

Eurozone Retail Sales (MoM) (MAR)

-0.1%

0.2%

Medium

9:00

EUR

Eurozone Retail Sales (YoY) (MAR)

2.6%

2.4%

Medium

10:15

EUR

ECB's Weidmann Speaks in Frankfurt

-

-

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.1296

1.1416

1.1457

1.1536

1.1577

1.1656

1.1776

GBP/USD

1.4129

1.4370

1.4453

1.4611

1.4694

1.4852

1.5093

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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