For most of the last few months, Dollar strength has been prominent as markets show concern over the financial disintegration that is being seen in the Eurozone and geopolitical tensions cause investors to move into safe haven assets, according to data released by MediaGroup London. The PowerShares DB US Dollar Index Bullish ETF (UUP) has outperformed as a result, but it is still unclear whether or not we will see these trends continue once markets return to full liquidity levels in September. Once the negative news stories out of the Ukraine, Gaza, and Iraq start to fade from the headlines, one of the key drivers in Dollar strength will be removed and fundamental traders will begin to look at the next likely actions to be undertaken by the US Federal Reserve.
Overall optimism is still an important factor to watch, however, as this will impact the ability for carry trades to move higher. The S&P 500 has yet to firmly overcome the 2000 mark but a move like this is looking imminent, and this would be helpful for carry trade forex pairs as we head into the Fall months. Here, we look at the latest technical developments in the forex majors.
Week Ahead: Forex Markets Analysis - EUR/USD, USD/JPY
EUR/USD - Euro vs. US Dollar
Critical Resistance: 1.3330
Critical Support: 1.3080
Trading Bias: Bearish on Rallies
(Chart Source: CornerTrader)
EUR/USD Forex Strategy: Sell rallies into support turned resistance at 1.3330, take profits into long-term historical support at 1.3080.
“The downtrend in the EUR/USD continues,” said Vlad Karpel, options strategist at TradeSpoon, “and we are now crossing over from medium-term arguments to longer-term arguments for why this could continue.” On the charts, prices have officially violated the 61.8% Fib retracement of the move from 1.2780 (which comes in at at the 1.3250 level), so there is scope here for much larger moves once the oversold hourlies chart to correct themselves.
The Daily RSI is also flirting with the 30 mark, so wait for a bounce back into prior resistance levels before pulling the trigger on short trades. The last bounce on the hourlies was seen around 1.330, so this should be the area to use a resistance for new positions. Be quick about taking profits, however, as a good portion of this bearish move has already completed.
USD/JPY - US Dollar vs. Japanese Yen
Critical Resistance: 105.10
Critical Support: 102
Trading Bias: Bullish Breakouts Seen Now
(Chart Source: CornerTrader)
USD/JPY Forex Strategy: Expected upside breakout has commenced. Wait for dips back into support at 102 before buying the pair again.
We have been bullish on the USD/JPY for most of the year, and the latest confirmation of this projection came with the upside violation of the recent uptrend line support just below 103. The fact that the latest move has been so forceful is relatively clear evidence that the true market forces are working in the bullish direction for this pair. Long term positions here can benefit by buying as close to the 100.80 mark as possible, but this is unlikely at this stage given the latest break. For these reasons, it makes sense to start gaining some long exposure if prices are able to trade back into the lower 102. This area offers much better risk to reward prospects that what is seen at current levels.