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FX Analysis – Technical Outlook (2016-01-04)

by James Chen


USD/JPY began the new year with a sharp slide as global equity indices plunged in reaction to weak Chinese manufacturing data that reignited fears of an ongoing economic slowdown in China. With the Shanghai Composite index closing down nearly 7%, and US and European stocks following suit with a selloff on Monday morning, investors initially rushed into the relative safety of the Japanese yen. This prompted the USD/JPY currency pair to plummet below the key 120.00 support level, establishing more than a 2-½ month low in the process. Since the latter half of December, USD/JPY has been falling in line with increased yen strength due to volatility in the equity markets as well as a consolidating US dollar. Led by economic and financial troubles in China, major stock markets could continue to experience heightened volatility well into this new year, potentially placing additional pressure on USD/JPY. With any sustained trading below the noted 120.00 level, the next major downside target is at the 118.00 support level, last hit in mid-October. With continued bearish momentum, a further price objective resides at the 116.00 support level.



Since early December, EUR/USD has been in consolidation above the 1.0800 support level and generally sandwiched between two major moving averages – the 50-day to the downside and the 200-day to the upside. This 50-day moving average has just recently descended to run in very close proximity to the 1.0800 support level. Despite the current consolidation and prolonged range trading, the directional bias for EUR/USD remains bearish in light of continuing divergent monetary policy between the Fed and ECB, as well as the clear long-term downtrend for the currency pair. A sustained breakdown below the noted support confluence of the 50-day average and 1.0800 level would lend further strength to this long-term downtrend. In the event of this breakdown, the next major downside target remains at the 1.0500 level, last approached in the beginning of December.



The latter half of December saw a sustained plunge for GBP/USD as it continued its methodical downtrend from last June. This downtrend has formed progressively lower lows and lower highs since the 1.5900-area high in mid-June. The past half year has seen a steady but substantial slide in the exchange rate as it became progressively clearer that the Fed would begin raising interest rates well before the Bank of England (BOE) would follow suit. With the Fed having already hiked rates in December and the BOE still uncertain as to the timing of its own monetary tightening cycle, this difference could become even more pronounced, lending to further potential losses for GBP/USD. Having dropped below the 1.4800 support level at the very end of 2015, establishing a new 8-month low, the directional bias for the currency pair continues to point to the downside. With any further continuation of the strong downtrend, the next major target immediately to the downside is at the 1.4600 support level, last hit when the currency pair bottomed out in April. On any continuation of bearish momentum, a further downside price objective resides around the 1.4500 support level.


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