FX Setups for the Week of October 22, 2018

FX Setups for the Week of October 22nd, 2018

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Risk-On/Risk-Off Themes Remain

It’s been an interesting start to Q4, if not a bit familiar to Q1 of this year. That’s when the blistering equity rallies in the United States finally saw some form of pullback. The Dow retraced to the 38.2% Fibonacci Retracement of its post-Election move in January, and for the rest of Q1 and into Q2, prices continued to trade around that support. But – Q3 ushered in a return of the bulls, and prices in US equities broke out in a very visible fashion and that ran for the duration of the quarter, with the Dow Jones putting in a 12.4% incline from the June lows to the October higher.

But three weeks into Q4 and there’s a far different picture than what was seen last month. Worries around Brexit have cropped-up again, and it appears as though this week brings a very real chance of a no-confidence vote around PM, Theresa May. In Europe, worries around a stand-off between the newly-installed Italian government and the European Commission continue to prod volatility into European markets; and even Japanese stocks have shown some wobble after the robust breakout that showed up in September.

Below, I look at four setups designed for this week’s price action.

Bullish NZD/USD on Hold Above .6500

While US Dollar strength has remained a fairly pronounced theme so far in Q4, NZD/USD continues to string together traits of a bullish trend. Prices in the pair are coming off of a fresh higher-high that was set on Friday of last week, and bullish structure remains after last week’s support check at the 38.2% Fibonacci retracement of the September-October bearish move.

Prices are now testing the 50% marker of this major move, and this keeps the door open for bullish continuation strategies, targeting a move towards .6641, which is the 78.6% Fibonacci retracement of that same major move. Stops can go to break-even at that first target, with secondary targets directed towards the .6700 area on the charts, which provided considerable resistance in the month of September.

NZD/USD Four-Hour Price Chart

Chart prepared by James Stanley

Bullish USD/JPY on Hold Above 111.93

In this week’s Technical Forecast for Equities, I looked into the Nikkei as there have been some interesting dynamics there of late. September brought a robust breakout through a big long-term level in the index, and this took place alongside a return of consistent Yen-weakness. These risk trends held well into the Q4 open, with USD/JPY topping out around the same time as the Nikkei. The early-October sell-off was similarly priced into the pair with JPY strength showing against the US Dollar, and that theme ran into last week’s open with prices finding a bit of support around the 61.8% retracement of the August-October major move.

Last week saw a return of strength in the pair as US stocks tried to cauterize support, and if we do see the risk trade continuing to show indications of coming back, the topside of USD/JPY can remain as attractive.

The level of interest here appears to be around 111.93, which was the Friday swing-low in the pair that came in just ahead of fresh near-term highs. If prices break back-below that level, the return of the risk trade won’t look so attractive any longer. But – until that low is taken out, the prospect of bullish strategies can remain.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley

GBP/JPY Bearish Breakout Potential to 145.00

Sellers have come back into the British Pound, and as this week brings the possibility of a no-confidence vote for PM Theresa May, the potential is there for more pain in the Pound.

Last week saw sellers make a concerted push in GBP/JPY until a bit of support developed at the lower-low of 145.78, creating a 180-pip retracement ahead of the weekly close. But – the build of bearish structure remains as prices have been putting in both lower-lows and lower-highs, and this keeps the door open for short-side strategies in the pair.

This setup can be approached with breakout logic, looking for a print of fresh lows to run down to deeper support. Last week’s low of 145.78 can be utilized for such a purpose, with initial profit targets set to the Fibonacci level at 145.23. Stops can go to break-even at this point, with secondary targets set for 144.80 and tertiary targets around 143.75.

GBP/JPY Weekly Price Chart

Chart prepared by James Stanley

CAD/JPY Can Cut Both Ways On Hold Above 85.00

This is somewhat of the inverse of the above setup in GBP/JPY. While GBP/JPY is looking to capitalize on continued risk aversion, the topside of CAD/JPY should be a bit more amenable with themes of risk on.

This Wednesday brings a Bank of Canada rate decision with the high probability of another 25 basis point hike. The BoC, for most intents and purposes, has been fairly hawkish, even in light of softening rates of inflation. The Yen, on the other hand, continues to display price action attuned to risk tolerance, with themes of risk aversion showing Yen-strength while risk-on has helped to bring about Yen-weakness.

The shorter-term setup in CAD/JPY is building into a descending triangle formation. This will often be approached in a bearish fashion, as the horizontal support that’s been helping to hold the lows may succumb to the selling pressure that’s compelled sellers to re-enter at lower-highs.

A break below support at 85.50 opens the door for a bearish test of 85.00 followed by 84.67; while a topside break through the swing-high at 86.37 opens the door for bullish strategies, targeting the 61.8% Fibonacci retracement 100 pips higher.

CAD/JPY Four-Hour Price 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.

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