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A "Make-or-Break" Scenario for USD/SEK

A "Make-or-Break" Scenario for USD/SEK

2014-01-07 13:00:00
Rafiul Hossain, Head Forex Trading Instructor

Talking Points:

  • "Massive" Rally and 61.8% Retracement
  • The "Make-or-Break" Support Level
  • Upside and Downside Price Targets

The US dollar (USD) took a near-one-way ride against the Swedish krone (SEK), where USDSEK bottomed in the low 6.30’s in mid-October and peaked around the 6.70 level in November. This was a massive move with only small pullbacks that were few and far between.

After this massive move, USDSEK failed to take out the highs around 6.70 after the Riksbank cut the repo rate by 25 basis points at its December monetary policy meeting. Furthermore, the Riksbank postponed the first repo rate hike into 2015 and announced that rates will remain low in Sweden.

Normally, a repo rate cut and adjustment to the rate path would have weakened the currency even more, but this means that most of the expectations for a lower rate path and repo rate cut were already priced in. This was probably driven by Sweden’s soft inflation numbers from November.

Guest Commentary: Technical Outlook for USD/SEK

Support: 6.45, 6.37-6.30, 6.30

Resistance: 6.55, 6.60, 6.70

Since the lows in October around 6.30 to the peak around 6.70 in November, USDSEK has retraced 61.8% (to around 6.45) of the move, but has failed to establish a higher high after a weak bounce from this support level.

The result is a lower low from the peak in November, and to boot, the support level around 6.45 is again under pressure. A close below this level might result in deeper pullback, and in that case, earlier lows around 6.30 might provide support.

Furthermore, the positive trend is also under attack. We might see some choppy price action at current levels, but an establishment below the current trend line might give us a new trend with lower highs and lower lows in the weeks to come.

For now, the critical area will be the support area around 6.45. A bullish reversal pattern from these levels might give us a new entry opportunity ahead of a potential move up to the November highs around 6.70.

On the downside, however, a close below support will give a new sell signal, and the earlier lows around 6.30 might then act as support.

Trade Idea for USD/SEK

Await price action at the current support level around 6.45. If we see a bullish reversal pattern, we might see another test of the November highs around 6.70 and a potential push higher in 2014. On the downside, however, a close below support would be critical and could give way to a re-test of the lows around 6.30.

With visibility on the charts rather low and risk still quite high at this point, it remains to be seen whether USDSEK will manage to defend the uptrend from the lows in October, or if a new trend with lower highs and lows will prevail. Until a signal does emerge, patience is a virtue!

By Rafiul Hossain, Guest Analyst, DailyFX.com

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

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