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Daily Observations: August 20, 2012

Daily Observations: August 20, 2012

Christopher Vecchio, CFA, Senior Strategist

Current Positions:

- Short AUDNZD from 1.3060, Stop at 1.3080, Target 1 at 1.2850

- Long EURCHF from 1.2018, Stop at 1.1990, Target 1 at 1.2500, Target 2 at 1.2750

- Short GBPJPY from 124.50, Stop at 125.80, Target 1 123.85, Target 2 at 121.50

Pending Positions:

- Pending Short AUDUSD 1.0535/45

- Pending Long USDJPY daily close >80.65

- Pending Long EURUSD daily close >1.2400/05

- Pending Short EURUSD daily close <1.2200/20

- AUDNZD: Last Tuesday I wrote: “The pair has moved higher thus far today, after back-to-back Inverted Hammers after a decline, signaling a potential reversal over the coming days; this could negatively impact the short taken.” Indeed, a move higher as transpired before Target 1 was hit; we nonetheless remain short as we view this as merely a pause lower; rallies into 1.3005 should be sold. As per the original trade plan, on a test of 1.2850, I will take 1/2 profit and then resell rallies back into 1.2920/30. With my Stop at breakeven (1.3060), the current position is insulated from losses. Given the divergence between the AUD and the NZD recently, I’m looking to sell further rallies in this pair. Bias: bearish.

- AUDUSD: The top that we posited that was forming on the 4-hour charts is close to being confirmed, now that prices have broken below 1.0500; ideally, a daily close below 1.0435/40 (August low) would confirm. At current price, near-term support comes in at 1.0435/45 and 1.0380/85, though with shorter-term timeframes showing exhaustion, we suspect a bounce could be had first. Near-term resistance comes in at 1.0480/1.0500, 1.0535/45 (former swing highs), 1.0580, 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0195/1.0200 (100-DMA). Bias: bearish.

- EURUSD: The pair has fallen back today after failing at its 50-DMA on Friday, but prices are expected to continue to range with both resistance and support tightening around current prices. The Bundesbank comments offer the most significant catalyst to thrust the EURUSD from its range, with the most likely resolution to the downside given the bias of the commentary. Near-term resistance comes at 1.2360/80 (former swing highs, Friday high, 50-DMA). A daily close above this zone brings into focus 1.2405, the potential Neckline on what could be an Inverse Head & Shoulders bottoming pattern. Given the Head at 1.2040/45, this would draw into focus 1.2760 on a daily close above 1.2405. Near-term support comes in at 1.2310/30, 1.2250/65, and 1.2155/70. Bias: neutral.

- GBPUSD: More sideways price action in the GBPUSD as light volume and few catalysts have offered up the opportunity for the pair to break its exceptionally tight range. In fact, the 5-day ATR has dropped to 62.3-pips, the lowest such rate since early-May, when the pair traded at 1.6146. In the coming month, the GBPUSD dropped as low as 1.5268. Nevertheless, our outlook is little changed from Monday [August 6]. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. Interim resistance comes in at 1.5710/15 (200-DMA), 1.5735/45 (August high, 100-DMA), and 1.5755/60 (ascending trendline resistance from parallel drawn off of August 6 and August 10 lows to August 7 high). Near-term support comes in at 1.5670/75 (10-DMA), 1.5635/40 (last week’s low, 20-DMA), and 1.5625 (ascending trendline support off of August 6 and August 10 lows). Bias: neutral.

- USDJPY: A string of better than expected US data has shifted the fundamental bias of this pair, and indeed, the Rounded Bottom on the hourly charts has materialized a bullish outcome, as expected. This could be the first step towards the USDJPY Inverse Head & Shoulder formation playing out. With the Head at 77.60/70 and the Neckline at 80.60/70, this suggests a measured move towards 83.60/70 once initiated. The daily close above 79.15/20 (200-DMA) yesterday, in our opinion, brings near-term resistance in focus at 79.60/65 (100-DMA), which is also where the pair topped out today. We suspect that the pair may be overbought on shorter-term time frames and a pullback may be warranted before further bullish movements. Interim support comes in at 79.15/20, 78.60 (former swing lows) and 78.10/20 (lows from last week). Bias: bullish.

Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX.

--- Written by Christopher Vecchio, Currency Analyst

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

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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