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FOREX - The Primary Short-Term Indicator for USD/SEK

FOREX - The Primary Short-Term Indicator for USD/SEK

2014-02-14 19:49:00
Rafiul Hossain, Head Forex Trading Instructor
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Talking Points:

• Two Conflicting Trends in USD/SEK

• A Riksbank Policy Stance That Could Backfire

• Possible Long Set-up in USD/SEK

While trapped in a horizontal range, the dominant trend for USD/SEK is yet to be determined, however, technical and fundamental factors suggest tradable upside potential at current levels.

So far in 2014, USD/SEK has been trading in a horizontal range between 6.60 and 6.40 while caught between two conflicting trends. The first trend, which is downward in nature and characterized by lower highs, has been in place since the pair peaked just above 6.86 in July 2013. The second trend, which features higher lows, has been established since the bottom in late October.

Now, either a break and hold below the support at 6.40 will give a new sell signal, or a break above 6.60 will give a new buy signal.

The outcome of today’s Riksbank monetary policy meeting in Sweden came in as expected, as the repo rate was left unchanged at 0.75%. However, the rate path from Riksbank is noticeably higher than the market’s expectations (especially for 2015) and has not yet been priced in. This may offer potential for disappointments, particularly if macroeconomic numbers from Sweden fail to keep improving in line with Riksbank expectations.

Previous analysis: Short USD/SEK Near Key Resistance Level

As mentioned earlier, the range between 6.60 and 6.40 is the main indicator for USD/SEK in upcoming days and weeks. A break either way will give a new signal regarding possible price action.

However, the momentum, as measured by the Relative Strength Index (RSI), currently shows higher lows. This might support a possible retest of the downward trend established since summer 2013, which, at current levels, would provide resistance around 6.53-6.55.

Bear in mind, however, that the main resistance is the horizontal level at 6.60, and USD/SEK will need to clear this area in order to gain traction for further upside movement.

On the downside, we have established great support around 6.40, which is both horizontal and consistent with the newly positive trend (higher lows) since late-October. If this fails to hold and USD/SEK breaks this support area, we might see further downside to 6.30 and beyond.

Forex Technical Outlook for USD/SEK

Forex-Primary-Short-Term-Indicator-for-USD-SEK-0023_body_Image63.jpg, FOREX - The Primary Short-Term Indicator for USD/SEK

Support: 6.45, 6.40-6.37, 6.30

Resistance: 6.60, 6.70, 6.85-6.95

From a technical standpoint, there can be no clear trend direction before one of the two primary levels (6.60 or 6.40) are broken, but for now, the upside looks more favorable considering the risk profile on long entries from current levels.

Fundamental Factors in Play for USD/SEK

From the most recent monetary policy meeting, Riksbank projects 125 basis points (bps) of rate tightening in 2015. This is considerably higher than Sweden’s neighbor Norway, where the Norges Bank forecast is for only 30 bps of tightening in 2015. Furthermore, the market is currently pricing in less tightening for now.

If Riksbank continues to follow the current rate path, Swedish economic data will need to improve fast and steady in order to support such policy measures in the future.

Another factor to support potential rate hikes would likely be Sweden’s inflation numbers. If inflation starts to pick up by more than expected, Riksbank would then have that reason to follow the planned rate path.

Overall, we believe the current rate path from Riksbank is too optimistic and offers some potential for disappointments due to great distance between underlying growth and what the Bank expects at this time.

Trade Idea for USD/SEK

Buy USD/SEK at current levels (6.44-6.40 area). The stop loss should be executed if USD/SEK closes below 6.39 on the daily time frame.

There are two target prices for this trade, the first one being 6.55, while the second and final target is the critical horizontal resistance level, which is 6.60. Stop losses could even be moved to break even if/when 6.60 is reached.

By Rafiul Hossain, Guest Contributor, DailyFX.com

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

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