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Technical Evidence Building for More Significant USD Rally Ahead

Technical Evidence Building for More Significant USD Rally Ahead

2011-02-07 11:50:00
Joel Kruger, Technical Strategist
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The US Dollar is starting to find favor in the eyes of the markets, with the currency closing out the previous week very well bid. The final surge in the Greenback was driven by a significant drop in the unemployment rate which helped to fuel optimism for the outlook of the US economy. Although the actual NFP number was disappointing, it seemed as though the unemployment number easily overshadowed any negative fallout from the NFPs. Technically, the EUR/USD weekly chart is starting to look quite bearish after putting in back to back negative closes.

Relative Performance Versus USD Monday (As of 11:30GMT)

  1. GBP -0.05%
  2. NZD -0.13%
  3. CAD -0.17%
  4. AUD -0.18%
  5. EUR -0.21%
  6. JPY -0.23%
  7. CHF -0.45%

Two weeks ago we saw a bearish doji close, and this past week we saw a bearish gravestone doji-like close. This makes a strong case for a medium-term lower top by 1.3860 ahead of the next major downside extension. But we will need to see a daily close below 1.3540 this week to further encourage these USD bullish prospects. Perhaps, the USD Index presents an even more compelling case for a USD bullish reversal after this market stalled out perfectly by the 78.6% fib retracement off of the major November-December low-high move, and rallied to put in a bullish hammer close on the weekly. A daily close back above 78.35 this week will further confirm reversal prospects.

Technical_Evidence_Building_body_Picture_5.png, Technical Evidence Building for More Significant USD Rally Ahead

Moving on, we are finally starting to see the Australian Dollar relent a bit after the currency had been so well bid in the previous week. Data has been released already this week and the results have not been impressive with retail sales coming in much weaker, while performance of construction results were also lower than the previous print. We are short the Australian Dollar against the US Dollar from the 1.0100 handle and look for some decent follow through on our trade over the coming days. The softer economic data and increased inflationary pressures out of China should offer the perfect recipe for some major profit taking in the antipodean and we look for declines to accelerate on a break below 1.0055.

Data in the European session was quite mixed with a better than expected Eurozone sentix investor confidence reading, and a much weaker than forecast German factory orders. However, based on the price action in European trade, it seemed as though market participants were more inclined to use the German data as a good excuse to keep selling the Euro. All in all, the calendar was rather quiet in Europe.

Looking ahead, in North America, things don’t get any more active with only Canada building permits (2.0% expected) at 13:30GMT and US consumer credit ($2.5B expected) at 20:00GMT. US equity futures and oil prices are tracking moderately higher, while gold trades flat.

TECHNICAL OUTLOOK

Technical_Evidence_Building_body_eur.png, Technical Evidence Building for More Significant USD Rally Ahead

EUR/USD:Right now it is all about the weekly chart with the market putting in a bearish doji weekly close two weeks back and now putting in a bearish gravestone-like close this past week. This helps to increase potential for a major reversal with a medium-term lower top now sought out by 1.3860 ahead of the next major downside extension. For now, look for a daily close below 1.3540 to accelerate declines, while any rallies into the 1.3750 area should be well capped. Only back above 1.3860 delays and gives reason for pause.

Technical_Evidence_Building_body_jpy2.png, Technical Evidence Building for More Significant USD Rally Ahead

USD/JPY: Despite the latest setbacks below 82.00 which had put the pressure back on the downside, the market remains well bid on dips towards 81.00. Friday’s price action was highly constructive, with the market putting in an intense bullish outside day which consumed the previous 4 daily ranges. From here, we look for continued upside back towards 83.70 over the coming sessions, with a break above to accelerate towards more critical resistance at 84.50. Any setbacks should be well supported ahead of 81.50 with only a daily close back below 81.00 to negate.

Technical_Evidence_Building_body_gbp2.png, Technical Evidence Building for More Significant USD Rally Ahead

GBP/USD: Bearish reversal formations don’t get much prettier than the one seen last Thursday with the market putting in a bearish outside day after stalling out just ahead of key psychological barriers and range resistance by 1.6300. The formation is almost too pretty, but a break and close below 1.6120 on Friday helps to confirm topping and open the door for a more significant pullback towards the 1.5800 area over the coming sessions. Look for any intraday rallies to be well capped ahead of 1.6200 with setbacks seen accelerating on a drop back under 1.6035.

Technical_Evidence_Building_body_swiss1.png, Technical Evidence Building for More Significant USD Rally Ahead

USD/CHF: Although the market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Friday’s daily close above 0.9540 confirms and should help to accelerate gains. Any intraday setbacks should now be well supported ahead of 0.9450.

FLOWS

Stops above 0.9650 in USD/CHF. Decent stops below 1.3500 in EUR/USD; semi-official name on the bid; leveraged names and sell side shops on the offer. Large barriers by 0.8400 in EUR/GBP. Asian central bank offers in GBP/USD. Japanese bank selling USD/JPY; buy side shops aggressively buying.

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Written by Joel Kruger, Technical Currency Strategist

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