So the Fed painted itself into a corner and while its hands are tied, it was interesting news last week to see the ECB and BOJ turning dovish again with further easing hinted in the near future. Something did indeed come out of Davos and this help was welcome as 2016 was looking more like 2008 every day.
Has it really changed the picture? Let’s consider the state of the two main US Dollar pairs below:
EUR/USD: still moving sideways in a longer term downtrend
On this Investor’s View chart of EUR/USD, the longer term Weekly Impulsive downtrend, labeled “I down”, is still in place (left hand chart, red price projection down). It may be nearing exhaustion (little time left, Risk Indicator in the Oversold zone), yet, for now, it could still reach parity (1.00) over the next few months. The Daily (middle chart) is holding onto a correction up (grey price projection), a move that started with Draghi’s doubt casting speech in early December and which may lead it up above 1.10 into the 1.13 levels. Yet, time is passing by and it is failing to break above the 1.09 – 1.11 support and resistance zone tested many times this year. Finally, the Hourly is now neutral to slightly bearish (i.e. Potential Bear trend with no price targets).
So, the longer term downtrend is still in place, and the reaction up since December has done little to prove otherwise. On the other hand, despite Draghi’s comments, the Hourly remains range bound for now, stuck between a strong resistance zone to the upside and a Dollar priced to perfection to the downside. This situation may linger on a bit more, until at least equity markets recuperate and the Fed/ECB divergence story is reinstated.
USD/JPY: attempting to resume its uptrend, yet early stages
It may be tempting to see a potential head and shoulder top on the longer term Weekly (left hand chart). For now at least, the FinGraphs trend is still heading up into its extended Impulsive 2 targets (“I2 up”), possibly above 130 in the coming year. That said, the Yen is still seen as “quality” or, more exactly, a carry trade funding currency (as the EURO has also become today). So, when the going gets tough and these trades unwind, capital flows back to it. It is amazing to see how similar the move down since mid last year on the USD/JPY daily (middle chart) is to the one on the S&P500. And for now, it is still in an impulsive downtrend (red price projection), which may still have some downside potential. The risk index may be Oversold, but we really need to see some traction. First, the Hourly (right hand chart) needs to break its corrective targets up above 119.0 (grey price projection), then USD/JPY needs to crawl back above 120, a support which has been tested many times this year and which may now act as resistance. It may take a few weeks, to work these levels through.
So basically, it’s Draghi and Kuroda against the market. If they manage it, it’s good for the Dollar, What else?
Disclaimer: All opinions, news, research, analyses, or other information in this publication are provided as general market commentary. These are meant for information and educational purposes only and should not be considered in any way as providing investment advice.