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Risk Aversion in the Forex Market: Trade It, or Fade It?

Risk Aversion in the Forex Market: Trade It, or Fade It?

James Stanley, Strategist

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- In this webinar, we used price action to look at macro markets after risk aversion has started to show across some key asset classes.

- We first looked at the U.S. Dollar via ‘DXY’. The Dollar appears to be trying to mark a bottom, as near-term price action shows higher-highs and higher-lows. But key here is the fact that while the Dollar has shown some element of strength, so has Gold and the Japanese Yen – giving this more of an appearance of continued risk aversion than a legitimate USD-bull scenario. Given the strength in the Yen, this can open the door to a series of setups to work with either a continuation or reversal of this recent run of risk aversion.

- We looked at these setups in the Analyst pick set earlier this morning. For a continuation of risk aversion, GBP/JPY is a very attractive option, as the pair has broken below a key support level that is confluent with the under-side trend-line from the ascending wedge pattern that’s shown in the pair. We had discussed the setup in GBP/JPY two days ago, and since then prices have posed that under-side breech, opening the door for short-side exposure in the pair.

- On the other side, we looked at EUR/JPY as an option for a reversal of risk aversion. While GBP/JPY is showing a bearish move, EUR/JPY has held support around the 128.52 level, which is the 38.2% Fibonacci retracement of the ‘Abenomics’ move in the pair, as well as being support for the latter portion of July. We looked at this setup yesterday in the article entitled, EUR/JPY Technical Analysis: Buyers Respond to Fibonacci Support.

- In EUR/USD, price action is finding support in a confluent zone that runs from 1.1685-1.1736. Tomorrow’s U.S. CPI report tomorrow will be crucial for this setup, and another test of support in this zone, particularly if that test shows a ‘higher low’ above the prior swing around 1.1700, the door can be opened for topside, bullish continuation plays in the pair.

- in GBP/USD, we’ve seen prices break back-below the 1.3000 level after last week’s BoE rate decision. The fact that the BoE is not yet moved by inflation alludes to the fact that we’re likely going to need to see some additional above-line prints to motivate the bank towards more-hawkish policy options. If the Dollar can find some element of strength, or if the Yen can continue to run on the risk aversion theme, this could leave the British Pound in a weakened positon that could point to further losses.

- In AUD/USD, we’re seeing a bull-flag formation on the four-hour chart; but the longer-term setup here is a little less clear. The topside breakout in the pair very much syncs with the aggressive down-side run in the Dollar. Selling an oversold Dollar here can be a difficult prospect, and if we do see some element of strength in USD, the short-side of Aussie could be an attractive venue to trade that theme.

--- Written by James Stanley, Strategist for DailyFX.com

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

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