FX Setups for Week of May 7, 2018

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US Dollar strength has continued into another week, and this comes after three consecutive weeks of gains. The Greenback has surged up to fresh 2018 highs after spending much of the prior 15-months heading lower. This prior bearish run was taking place even as the Fed was one of the few Central Banks looking at higher rates and tighter policy, alluding to the fact that something else, outside of monetary policy, was doing the pushing.

What’s changed of recent hasn’t necessarily been something US-specific; as much as it’s been deterioration of inflation in other economies, helping to bring weakness to major pairs such as EUR/USD and GBP/USD, thereby helping to produce what’s been a considerable amount of USD-strength, even if the move is only a few weeks old. As we move into a week with US CPI on the calendar for a bit later, along with rate decisions out of the UK and New Zealand, the door is opened for continued USD volatility. Below, we look at a pair of setups in the FX-space for this week.

GBP/USD: Reversal Potential

Cable has been a hard sell for much of the past two weeks. While the currency came into April with considerable strength, that theme has soundly reversed after March inflation numbers came in disappointingly low, leading to the thought that the BoE may not be hiking rates at their ‘Super Thursday’ meeting later this week. GBP/USD has become oversold on the Daily chart, and prices have run into a key support level around 1.3500. Just a bit below the psychological level of 1.3500 we have the 50% retracement of the ‘Brexit move’ in the pair, and this was the same study of which the 78.6% Fibonacci retracement helped to mark the high in the pair just a few weeks ago. Stops can be set below the 50% retracement at 1.3478 for approximately 80 pips of risk, with initial targets set to 1.3660. This would offer a slightly better than one-to-one risk-reward to the initial target, at which point stops can be adjusted to break-even, looking for a deeper topside move towards 1.3725.

GBP/USD Daily Chart: Oversold Cable Tests Support Ahead of BoE Super Thursday

gbpusd daily chart

Chart prepared by James Stanley

NZD/USD – Short Breakout Entry on Print of Fresh Lows Sub .7000

One of the challenges with the above setup is that it’s essentially looking to play two reversals at once. Not only has the British Pound been very weak, but the US Dollar has been very strong. And while there is some element of relation between those two moves, the fact of the matter is that both may not reverse at once. If we do see a continuation of US Dollar strength, commodity currencies remain attractive as a venue for continuation.

Earlier in April, we looked at playing USD-strength through NZD/USD; and the pair put in a fairly concerted bearish move over the next few weeks, helping to fill-in a longer-term range. But – when the pair neared the .7000 psychological level, the prospect of continuation began to dim, and we looked at exiting the setup early.

NZD/USD Daily Chart: Bearish Potential Down to Range Support As Price Finds .7000 Big Figure

nzdusd daily chart

Chart prepared by James Stanley

Since then, support has continued to show around the .7000 big figure, so if we do see a legitimate continuation of USD-strength, the door opens for down-side breakouts on prints below last week’s low. Last week’s low came-in at .6984, and breaks below this level can be used to trigger short-side breakouts. Initial stops can be placed above the prior swing-high at .7042, making for an approximate 58 pip stop. Initial targets can be set to .6900, at which point stops can be adjusted to break-even. Secondary profit targets can be cast to the support side of the longer-term range, starting at .6870, with another potential target at .6820.

NZD/USD Hourly Chart: If Down Move is to Continue, Make Bears First Show Their Hand (New Lows)

nzdusd hourly chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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

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