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EUR/USD, USD/JPY Hint at Ugly Potential for USDOLLAR Index

EUR/USD, USD/JPY Hint at Ugly Potential for USDOLLAR Index

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EUR/USD consolidation after breakout looks like a bull flag.

- USD/JPY head & shoulders topping pattern gaining credibility.

- As market volatility rises, it's a good time to review the "Traits of Successful Traders" series.

The USDOLLAR Index is treading water today, but the rebound from the lows around Friday's US labor market report looks weak at best. Momentum indicators (daily MACD and Slow Stochastics) are starting to turn lower into bearish territory, and price is now treating the daily 8-EMA as trend resistance. There isn't much agreement among the components of the USDOLLAR Index either: AUD/USD and GBP/USD are moving in one direction; while EUR/USD and USD/JPY are moving in another.

There seems to be a "risk on/off" theme at play: the Asian-linked commodity currencies and the British Pound ('Brexit'/EU referendum threat) are suffering; the Euro and the Japanese Yen are gaining ground. Markets are exhibiting a shift in risk preferences across the board: lower yielding, more liquid currencies are being bought up in favor of those with greater geopolitical or macroeconomic risk. As such, today's doji candle - pause in trend - may be inherently misleading.

While AUD/USD and GBP/USD suggest further weakness in risk-correlated assets, EUR/USD and USD/JPY are suggesting that more pain may be ahead for the greenback. EUR/USD is exhibiting a breakout retest in the form of a bull flag on its H4 timeframe that's aiming for $1.1450/1.1530; USD/JPY appears to be triggering a head & shoulders topping pattern that points towards ¥106.00/25.

See the above video for technical considerations in EUR/USD, GBP/USD, AUD/USD, USD/JPY, AUD/JPY, GBP/JPY, and the USDOLLAR Index.

Read more: February Seasonality Gives US Dollar Rebound Hope Next Few Weeks

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on the DailyFX RTN, Twitter, and Stocktwits at @CVecchioFX.

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

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