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FX Analysis – Technical Outlook (2016-03-07)

by James Chen


GBP/USD spent last week rising sharply in a rebound from its new 7-year low up to major resistance around the 1.4250 level. This rise occurred as the US dollar fell and worries about a potential UK exit of the European Union (Brexit) partially subsided. To start the new week, however, the dollar has tentatively rebounded and prompted a GBP/USD turn back down from 1.4250 resistance. From a technical outlook perspective, the currency pair continues to trade well under its 50-day moving average, despite last week’s rebound, and remains entrenched within a strong bearish trend. Going forward, pressure on the pound should be maintained with the June Brexit referendum on the medium-term horizon and a consistently dovish Bank of England disinclined to raise interest rates any time soon. While the US dollar persists in vacillating on constantly shifting expectations of another Fed rate hike, further monetary tightening this year in the US remains a distinct possibility. This possibility continues to support the dollar against other major currencies that are driven by more dovish central banks. For these reasons, GBP/USD continues to face major challenges ahead. As long as the currency pair remains below the noted 1.4250 resistance level and its 50-day moving average, the key downside target continues to be at the 1.4000 psychological support level. With any sustained re-break below that 1.4000 level, the next major downside target remains at the key 1.3500 support level, last hit in early 2009.



EUR/USD dropped to a one-month low approaching its 1.0800 support target last week as expectations of further stimulus by the European Central Bank (ECB) weighed on the euro. The long-awaited ECB press conference later this week will provide more clarity as to whether these expectations come to fruition. The drop during the first half of the week extended the currency pair’s recent plunge below both its 200-day and 50-day moving averages as well as a key uptrend channel extending back to early December’s low near 1.0500. During the latter half of last week, however, a falling US dollar prompted a EUR/USD rebound that pushed the currency pair back up to both the noted moving averages as well as the bottom of the noted uptrend channel. To start the new trading week, Monday has seen a tentative turn back to the downside as the dollar has begun to rebound once again. Whatever the outcome of Thursday’s ECB conference, the specter of further ECB easing should persist, which should place sustained pressure on the euro. As long as the currency pair continues to trade below its main moving averages and the noted trend channel, the key downside support target remains at the 1.0800 level, followed further to the downside by the major 1.0500 support objective.



USD/JPY spent much of last week in a relatively tight consolidation as a lagging US dollar was offset by rising and stabilizing equity markets. During the course of the past month, USD/JPY has plunged to establish a 15-month low around 111.00 support, re-tested that support level to form a potential double-bottom technical pattern, and then fluctuated in a consolidation above those lows. Currently, the currency pair has struggled to climb towards the top of this consolidation, but has been impeded both by technical resistance as well as a continuing sentiment of caution in the global equity markets. USD/JPY tends to track stock indices relatively closely due in part to the role of the Japanese yen as a “safe haven” currency. As such, higher stock index prices often tend to result in a higher USD/JPY, and fear-driven drops in stocks tend to pressure USD/JPY due to capital being drawn back towards the safety of the yen. Helping somewhat to protect the downside for the currency pair is the potential for a currency intervention by the Bank of Japan, which has a consistent aim of curbing unwanted appreciation of the yen. But uncertainty remains as to how effective such an intervention may actually be and at what USD/JPY level an intervention might be initiated. In any event, intervention could have the effect of limiting any extensive rise in the yen (or drop in USD/JPY). With equity markets continuing to show signs of increasing stability, USD/JPY could resume its rebound off the noted double-bottom lows, with the next major upside target at the key 116.00 resistance level, which is where the 50-day moving average is currently situated.


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