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Digestion Breaks, Fear Follows
It’s been a big week in FX as we’ve finally seen resolution of the digested setups in the US Dollar and, perhaps more to the point, EUR/USD. As the US Dollar surged to fresh yearly highs, the Euro broke down on fears surrounding Turkey. In a move that appears to be unrelated, the British Pound has continued its descent throughout the week after last week’s dovish Bank of England rate decision. With the BoE having hiked rates while sharing a rather down-trodden view of future economic conditions, there were even fewer reasons for buyers to defend support this week, and in response we saw Sterling continue to fall.
Meanwhile, there’s been a lack of follow-thru in Japanese Yen weakness following the Bank of Japan rate decision last week, and we’ve seen some profound strength in the currency when matched up with Euros, British Pounds or the Australian Dollar. Below, we look at two price action setups for next week. It’s important to note that these setups are designed for next week, as weekend gaps can vastly alter the nature of the below setups, thereby nullifying their potential.
Bearish EUR/USD on Hold Below 1.1620
Trading breakouts is notoriously difficult, particularly if a sitting entry order didn’t trigger the trader into the position as the initial break was taking place. We can see a clean break in a market like AUD/JPY, which is now around 100 pips below the level we were looking at for short-side breaks a couple of weeks ago.
But in EUR/USD, support built-in over seven weeks and held through a number of bearish drivers, including a couple of different ECB meetings. Last week saw a short-term break of the symmetrical wedge that had been building since late-May; and Wednesday of this week saw lower-high resistance show up at prior support, as taken from the trend-line projection that had previously made up the bottom side of that formation. This has led to a clean and visible down-side run to fresh yearly lows, and given the context surrounding the move, it would appear that the door is open for more.
The complication at this point is one of entry, as the move is rather stretched at the moment. Below, we look at three different areas of potential resistance that could be used as entry points for short-side EUR/USD setups. The first of these zones, from around 1.1445 up to 1.1470 should only be utilized by those that are comfortable with aggressive stances. The area from 1.1509 up to 1.1528 could be a more comfortable point of establishing exposure as this is the same zone that helped to hold the lows in the pair for almost two months.
If we do see a sustained break above 1.1530, then we’re likely also going to be seeing calm around the current situation brewing around Turkey, and this would re-open the door for resistance to show at the same area where prices had turned this week. For that we have our ‘r3’ zone that runs from 1.1592 up to 1.1619.
EUR/USD Four-Hour Price Chart
Chart prepared by James Stanley
Bearish GBP/JPY to 140.00 And Beyond
We have a similar setup in GBP/JPY price action, although it appears as though it is driven by a different rationale than what we’ve seen in EUR/USD. In GBP/JPY, the pair has remained bearish since last week’s BoE rate decision, and with the bank taking on a very dovish tone, there are even fewer reasons for bulls to defend support or to look at reversal plays. Brexit is a brute force of risk at this point, and it appears as though we’re at least a month away from any element of clarity on that front. This, collectively, makes for a fairly strong case for bearish continuation in the pair, particularly if we see the Japanese Yen continuing to hold gains from this week..
Much like EUR/USD, the danger around trend continuation is just how stretched the move has become during this recent sell-off. Rather than chase, we’ve identified two different areas of possible resistance that can open the door for bearish exposure in the pair.
Price action in GBP/JPY has spent the entirety of August riding underneath a bearish trend-line, and this keeps the door open for bearish continuation strategies. Below, we’re looking at two areas for potential resistance below the 143.50 swing high, each of which can re-open the door for bearish continuation plays in the pair.
GBP/JPY Four-Hour Price Chart: Bearish Continuation Potential
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.
Forex Trading Resources
DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.
If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX