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US Dollar Rejection at Flag Top Not to Be Taken Lightly

US Dollar Rejection at Flag Top Not to Be Taken Lightly

Christopher Vecchio, CFA,

Talking Points:

- EUR/USD holds $1.0800/50 swing zone, basing again.

- USD/JPY remains weak after key reversal around BOJ.

- See the December forex seasonality report.

Reflexively, a stronger EUR/USD at any point in Q1’16 will increase the chances of the ECB acting again in March; and if EUR/USD is weak all quarter long, then it becomes highly unlikely that the ECB ease further – which in and of itself, as we saw on December 3, is a very powerful force to keep the Euro afloat.

Elsewhere, the fundamental contrast of the British Pound and the Japanese Yen, in context of recent technical developments, makes short GBP/JPY an appealing prospect for 2016. By mid-December 2015, the pair was starting to break down through a two-plus year trendline dating back to the October 2013, October 2014, and October 2015 year lows. Both daily and weekly momentum indicators suggest that renewed downside pressure was emerging into 2016: Slow Stochastics and MACD had started or were starting to move into bearish territory.

Now that the trendline is breaking, a visit to recent swing levels lower seems likely: September 2015 low near ¥180.00 (check - today); the April 2015 low near ¥175.00; and the October 2014 low near ¥168.00. Only if price were to fail to sustain a break below ¥180.00 and subsequently return above ¥189.00 would change this bias.

Read more: JPY Quietly Positioning Itself for Strong Start to 2016

Lastly, as we approach the holidays and thus less liquid markets through the end of the year, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

--- Written by Christopher Vecchio, Currency Strategist

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