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FX Analysis – Technical Outlook (2016-03-14)

by James Chen

Technical developments:

  • EUR/USD suffered some wild swings last week, but ended up significantly stronger after Thursday’s ECB press conference. Technical bias: Neutral to Moderately Bearish.
  • GBP/USD has been steadily rallying in a relief rebound, but this week’s monetary policy releases from both the Bank of England and US Federal Reserve could challenge this rally. Technical bias: Neutral to Moderately Bearish.
  • EUR/GBP has formed a major head-and-shoulders pattern that could signal exhaustion and a potential reversal after the sharp uptrend that has been in place for the past three months. Technical bias: Bearish.
  • AUD/USD has continued to rise with a rebound and recovery in commodity prices, and could be poised to extend its gains after breaking out above a key resistance level. Technical bias: Moderately Bullish.

EUR/USD

james-chen-EURUSD-2016-03-14

Last week saw extreme swings for EUR/USD, especially on Thursday when the European Central Bank (ECB) announced a monetary easing package that exceeded expectations. The initial announcement prompted a swift plunge for EUR/USD, but the currency pair reversed those losses on Thursday afternoon when ECB President Mario Draghi appeared to signal a possible end to rate cuts. This prompted EUR/USD to climb rapidly above prior resistance at 1.1100. On Friday, the currency pair pulled back to hit that 1.1100 level once again. These very volatile swings towards the end of the past trading week have left EUR/USD traders struggling to determine direction. Thursday’s surge above 1.1100 also broke above both the 50-day and 200-day moving averages as well as the bottom border of a key uptrend channel extending back to December’s lows near 1.0500. With the ECB announcement out of the way, the next major release affecting EUR/USD will be the critical FOMC statement coming out of the US this week. If the Fed becomes more dovish as a result of the ECB’s easing actions, EUR/USD could potentially extend Thursday’s Draghi-driven gains. In the opposite scenario where a still-hawkish Fed continues to be open to further rate hikes, the currency pair could revert back down to its recent lows. The line in the sand for both of these scenarios continues to be the noted 1.1100 support/resistance level. A sustained move above 1.1100 this week could begin to target further resistance around the 1.1450 area, while a strong move back below 1.1100 could once again target major support at 1.0800.

GBP/USD

james-chen-GBPUSD-2016-03-14

GBP/USD spent last week stalling and fluctuating in consolidation above and below both its 50-day moving average and the key 1.4250 area. Prior to this consolidation, the currency pair had been rising sharply in a relief rebound from late February’s 7-year lows below 1.3900. This week brings the heavily-anticipated monetary policy statements from both the US Federal Reserve and Bank of England (BoE). The BoE has generally been seen as the more dovish of the two banks in its prolonged delay of implementing an interest rate hike due to ongoing concerns over weak inflation and lagging economic growth. At the same time, the Fed has vacillated for the past few months in response to mostly positive, but sometimes conflicting, US economic data. Overall, however, the Fed has been considered to be consistently more hawkish than the BoE in terms of openness to raising interest rates. This comparative central bank outlook could either be reinforced or refuted based upon the statements issued by the Fed and BOE this week. If reinforced, GBP/USD could fall back towards its recent multi-year lows and potentially continue its well-entrenched bearish trend. If refuted, the currency pair could extend the sharp rebound that has been in place since the beginning of the month. In the run-up to and after this week’s central bank announcements, the noted 1.4250 area and 50-day moving average should continue to be the area to watch on GBP/USD. With sustained trading below this area, the key downside target continues to be at the 1.4000 psychological support level, followed by the major 1.3500 support level. To the upside, any sustained extension of the current rebound above the noted resistance factors should be met by strong further resistance around 1.4500.

EUR/GBP

james-chen-EURGBP-2016-03-14

The wild ECB-driven swings last week also affected the EUR/GBP cross currency pair in much the same way as they did for EUR/USD. In the case of EUR/GBP, the pair whipsawed rapidly below and above the key 0.7750 level during and after Thursday’s ECB events. After ending Thursday well above 0.7800, EUR/GBP pared its gains by falling back down towards the noted 0.7750 level early on Friday. While Thursday's euro surge was strong, it remains to be seen if it can be sustained, especially in light of the rather extensive easing measures that were actually slated to be implemented. For the EUR/GBP currency pair, there is also the very important consideration of how the Bank of England’s monetary policy stance has evolved. This should be clarified this week when the UK central bank is scheduled to hold its key monetary policy meeting and summary. From a technical perspective, EUR/GBP had been rising in a clearly-defined uptrend since early December before breaking down below its uptrend line in the beginning of March. This breakdown extended further below the noted 0.7750 support level before recently reaching down to its 50-day moving average. The currency pair was on the verge of a breakdown below that moving average before Thursday’s Draghi-driven reversal lifted it well above. In the event that Thursday’s rally becomes extended, major upside resistance is at the key 0.7900 level. Any breakout above that level, especially if the Bank of England issues a dovish summary this week, would confirm a continuation of the bullish trend, with the next major upside target around the 0.8050 resistance level. In the opposite technical scenario, the currency pair has just formed a clearly bearish head-and-shoulders reversal pattern. This hints at a potential exhaustion of the uptrend that has been in place since early December. In the event of a breakdown below this pattern, the next major downside target is around the key 0.7450 support level.

AUD/USD

james-chen-AUDUSD-2016-03-14

AUD/USD has spent the past two weeks rising sharply as commodities have staged a significant rebound and recovery. Also helping AUD/USD’s rise was the Reserve Bank of Australia’s decision two weeks ago to keep interest rates on hold instead of cutting rates further. This two-week rise extends and accelerates the currency pair’s climb from January’s multi-year lows near 0.6800 support. After breaking out above the 0.7200 prior resistance level in the beginning of March, AUD/USD went on to target major upside resistance at the 0.7500 psychological level. That level was hit and tentatively exceeded towards the end of last week. This breakout is a significant technical event if it is sustained. In the event that commodities continue in recovery mode, AUD/USD could continue to rise after having established a bottom early this year. In this event, the next major upside targets in the currency pair’s climb are at the 0.7700 and 0.7900 resistance levels.

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