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FX Analysis – Technical Outlook (2015-08-10)

by James Chen

EUR/USD

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EUR/USD has continued to drift lower within a large trading range, most recently retreating from major resistance around the 1.1100 level and sliding lower to approach its key support target around the 1.0800 level.

The currency pair’s attempt to rebound within this range in late July was met with strong resistance around the noted 1.1100 level, which was reinforced by the key 50-day moving average.

As long as EUR/USD continues to be rejected by this 1.1100 barrier and the 50-day moving average, the trend bias continues to be to the downside. Especially with a looming interest rate hike in the US, the US dollar should continue to be supported and the EUR/USD should continue to be pressured over the medium-term.

While EUR/USD continues to trade within a long-term downtrend extending back to the 1.4000-area high back in May of last year, the past three months have seen more of a sustained, but often volatile trading range generally between 1.0800 support to the downside and the 1.1400 resistance region to the upside.

In the short-term, if the noted 1.1100 resistance level is broken to the upside, the currency pair could continue to rise within this range towards its 200-day moving average and intermediate resistance around the 1.1275 level.

On a longer-term basis, however, EUR/USD continues to be biased towards a continuation of the longstanding downtrend. This continuation would be helped along by a breakdown below the noted 1.0800 range support level. In this event, the major downside support target is at the 1.0500 level, which is the area of March’s twelve-year low and site of a rough double-bottoming pattern in March and April. A further break below 1.0500, which would confirm a continuation of the long-term downtrend, could pressure EUR/USD towards further downside support around the 1.0200 level.

AUD/USD

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AUD/USD briefly touched a new six-year low under 0.7300 on the last day of July. After touching this new low of 0.7233, the currency pair quickly bounced but remained in consolidation near its lows.

This new low was the latest culmination of a substantial slide from around the 0.7700 level that has plagued AUD/USD since the beginning of July, as the US dollar has persistently strengthened due to impending rate hike expectations.

Also contributing significantly to the slide has been a plunge in commodity prices, especially gold, which are positively correlated with the Australian dollar and negatively correlated with the US dollar. From a broader perspective, AUD/USD has been trading within a clear bearish trend for over a year, since the 0.9500-area high in July of last year.

Early August saw a one-day rally for the currency pair, which was fueled in part by comments from the Reserve Bank of Australia (RBA) omitting its previous call for a lower exchange rate against the US dollar and stating that the Australian dollar was “adjusting to significant declines in key commodity prices.” Prior to those comments, the RBA had long deemed a depreciation of the Aussie as both likely and necessary, given the plunge in commodity prices.

While AUD/USD was able to rally significantly as a result of these comments, however, the move was not due to much more than a short squeeze after a long period of decline, and was unlikely to be sustainable. Indeed, those gains were quickly pared in subsequent days.

With the US dollar continuing to show robust appreciation in anticipation of an impending rate hike and gold wallowing near its five year lows, any positive economic news coming out of Australia should only have a limited upside effect, and AUD/USD could very well be poised for further significant losses.

For the near-term, any upside should likely be capped by strong resistance around the 0.7500 psychological level as well as the currently descending 50-day moving average. Only a break above these resistance factors would change the current directional bias towards a potential rebound for the currency pair.

To the downside, any sustained move back below 0.7300 could pressure AUD/USD towards a re-test of the new six-year low at 0.7233 that was hit just last week. This would place the 0.7000 psychological support target back in view, confirming a continuation of the long-term downtrend.

USD/CAD

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USD/CAD recently reached its upside target of 1.3200 and nearly an 11-year high as the US dollar has maintained its strength in the face of an impending rate hike and US crude oil (WTI) has continued to weaken relentlessly.

This combination of continued US dollar strength and persistently weak crude oil prices pressuring the Canadian dollar prompted the USD/CAD currency pair to break out to its new peak in early August, a high not seen since September of 2004.

From a longer-term perspective, USD/CAD has been trading for the past year within a strong bullish trend framed by a well-defined uptrend line extending back to July of last year. That trend line was tested on a pullback in mid-June, but for almost two months, USD/CAD has advanced almost unceasingly to its current heights.

With the US dollar continuing to strengthen on rate hike anticipation and with crude oil continuing to be pressured by persistent oversupply conditions and production levels, USD/CAD could well have further upside before making any substantial pullback or correction.

With any sustained breakout above the 1.3200 resistance level, the next major upside target is at the 1.3400 level. To the downside, any pullback from resistance should find key support around the 1.3000 psychological level.

USD/JPY

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USD/JPY tentatively broke out above key resistance around the 124.50 level last week on marked dollar strengthening after previously having been stuck below that level since June.

Expectations of an impending Fed rate hike have pushed the currency pair up in the past month from its recent low of 120.40 in early July.

The sharp rise since that low comes as the Japanese yen’s safe haven role has been deemphasized recently and the dollar has appreciated broadly against other major currencies.

As the timing of the Fed’s looming rate hike becomes clearer, USD/JPY should continue to benefit from a further potential rise in the US dollar.

If USD/JPY is able to sustain trading above 124.50, the next major upside target is at the original 126.00 objective, slightly higher than the 13-year high around 125.85 that was reached in early June.

Any further break above that objective, which would confirm a continuation of the multi-year bullish trend, could then begin to target the 129.00 resistance level to the upside.

In the event of a pullback within the current uptrend, strong downside support remains at the key 122.00 level.

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