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US Dollar Retracement Has Begun, Say Candlesticks

Having issued a blistering rally since mid-July against the other major the currencies, the US Dollar looks finally ready to give back some ground.

EUR/USD

Euro positioned to retrace loses

We sold EURUSD at 1.5510 having identified a Long Black Candle that closed beyond trend line support. The pair is now trading at 1.4305, bringing our floating profit to around 1,205 pips. Last week, we noted that although the pair had penetrated below a key long-term trend line (in place since March 2006), the 1.40 level may present formidable psychological support. Indeed, we see price action has yielded a Dragonfly Doji just shy of the 1.40 mark and proceeded to rally. We see potential resistance in the 1.4440-50 area on a re-test of trend line support-turned-resistance. At that point, we will look for signs of a return to bearish momentum to add to our short position. Broadly speaking, the next soft target remains the July 2007 top near 1.3860.

EUR/USD Strategy

1. Continue holding short EURUSD at 1.5510.

2. Retain stop-loss to 1.4994, protecting 516 pips in profit.

3. Next “soft target” lies near 1.3860. 

For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.

GBP/USD

Bearish momentum may finally yield a correction

Last week, we suggested that the precipitous decline of the British Pound against the US Dollar has taken the GBPUSD pair to trend line support in place since June 2001. We maintained that the long-term trend bias favors bears as the interest rate outlook for 2009 calls for Sterling weakness (bond yields forecast rate hikes for the Fed and rate cuts for the Bank of England). To that effect, we opted to look for a corrective bounce to offer a reference point for risk-reward analysis and present a short entry opportunity. We now see GBPUSD has shown a Hammer candlestick followed by a convincing rally, suggesting a correction has begun. Preliminary estimates for likely resistance point to the gap in the 1.8150-1.8230 area.

GBP/USD Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 

For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.

USD/JPY

Yen turns choppy below Wedge support

In recent weeks, we noted that USDJPY could diverge from US dollar strength seen in the other majors with the pair trading in a Rising Wedge formation confirmed by negative divergence with the Slow Stochastic oscillator. Indeed, USDJPY broke below wedge support even as the greenback scored gains across the remainder of the forex spectrum. We have since seen a pullback to re-test support-turned-resistance, with the next move favoring further downside from a purely technical perspective. That said, we continue to see a need for restraint in trading this pair. USDJPY has been very responsive to changes in risk sentiment in recent months and price action has turned choppy first following the Fannie/Freddie fiasco and now the apparent bankruptcy at Lehman Brothers. We will remain on the sidelines for the time being until some clarity emerges.

USD/JPY Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 

For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.

USD/CAD

Rally reversed at key resistance

Last week, we suggested USDCAD had found considerable resistance at the confluence of a trend line in play since May 2004, a multi-month top dating from 06/15/07-08/31/07, and the upper boundary of a Rising Wedge formation originating in October 2007. We now see that the Rising Wedge is being confirmed by negative divergence with the Slow Stochastic oscillator. We maintained that the fundamental perspective (as discussed in the Q3 Quarterly Canadian Dollar Forecast) continued to favor USDCAD strength and opted to look for a pullback to offer a long entry opportunity. Price action validated this analysis: the pair showed an Inverted Hammer at resistance and proceeded to sell off. We will monitor price action from here, looking for signs that support has been found to enter long for the next leg of the long-term bullish trend.

USD/CAD Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 

For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.

AUD/USD

Upside correction gathers steam

Last week we saw the Australian dollar break below a major supporting trend line in place since September 2001 to place the pair squarely above a multiple support/resistance level and psychological barrier at 0.80. We now see AUDUSD yield a concrete bullish Hammer followed by a strong rally, suggesting a correction of recent weakness is underway. Prices are already within range for a re-test of the aforementioned trend line. We will look for the bullish burst to exhaust momentum, setting up for an entry short to trade with the long-term down trend.

AUD/USD Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 

For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.

NZD/USD

Bullish bounce begins

Last week, we suggested that the New Zealand dollar broke below a major supporting trend line in place since September 2001 to find a near-term bottom in a key price congestion region around the 0.6660-0.6670 area. The end of the week produced a Hammer, with prices looking poised for a bullish reversal at this week’s open. With the overall trend still favoring the bears, a bounce higher sees resistance at 0.6840 on a re-test of the aforementioned long-term trend line (not shown). We will look for signs of exhausting bullish momentum here to initiate a short.

NZD/USD Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 

For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.

To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com