Dollar Strength And Potential Depth Thereof
Submitted by Nic Lenoir At ICAP
In FX the story everybody is watching since Friday is the USD, and where will its strength stop, as it is bringing with it equity weakness in the face of a strong employment report and a sharp correction in the commodity space.
Against the EURUSD if we close below 1.4872 the break of the 50-dma is confirmed and we will drop first to 1.4454, before testing the big support zone which was the break-out last May at 1.3740. The dollar index shows a break on Friday's close but by a slim margin. We expect confirmation in order to validate the price action. The only caveat is that the bearish impulse since recent highs at 1.5143 seems to be a complete 5-wave sell-off in Elliott terms which would call for a corrective rally now, and we have hourly divergence. If we do retrace before accelerating lower I would look at 1.4996 as a good entry for fresh shorts.
The AUDUSD and GBPUSD charts both are in the process of forming a H&S. Support for AUDUSD is 0.8950 and 1.6271 for GBPUSD. A break of both would open the way for more downside. We keep our medium term target of 0.8270 for now in AUDUSD, with a stop on a close above 0.9330 (where we recommended initiating shorts, and now confirmed as the key upside resistance). GBPUSD is more puzzling as the H&S triggered in late september in the end never reached its potential at 1.52, and further more the neckline for the current pattern is basically the extension of the neckline used for September. On a break of 1.6271 on a daily close we will target 1.5710 as the key support. Whether this move leads to a complete reversal of the dynamic in place since last spring will be contigent on breaking or respecting the 0.8270 and 1.5710 supports. In the short term however we ould expect bouncing off the necklines for both pairs, or at least consolidate before the next move lower.
On a side note EURGBP almost tested our support at 0.8980 where we had recommended buying. We are bullish as long as 0.8950 is not violated.
Good luck trading,