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FX Analysis – Technical Outlook (2016-02-22)

by James Chen

Technical developments:

  • USD/JPY should remain pressured and could be poised for further downside if equity market volatility persists. Technical bias: Neutral to Moderately Bearish.
  • GBP/USD has continued its retreat and could be headed towards a further breakdown to new lows. Technical bias: Bearish.
  • GBP/JPY has been increasingly weighed down by a weak pound and rising yen, and has broken down below its previous multi-year lows. Technical bias: Bearish.
  • EUR/USD has dropped sharply on the anticipation of additional ECB easing and concerns over a “Brexit”, and has tentatively broken down below the key 1.1100 support area. Technical bias: Moderately Bearish.

USD/JPY

james-chen-USDJPY-2016-02-22

USD/JPY spent the early part of last week rallying with global equity markets, but then falling back towards the end of the week as crude oil prices struggled to maintain recent gains and stock markets felt renewed pressure after previously staging a sharp recovery. Stocks fell as crude oil suffered a blow from US Energy Information Administration data reporting that crude inventory rose by 2.1 million barrels in the previous week. While less of a build than expected, this data refuted an earlier report of a sizable draw in inventories. Crude oil prices fell on this news despite continuing hopes for a deal among major oil-producing nations to limit crude output. With stock market fluctuations having recently followed crude oil prices closely, and the Japanese yen continuing to benefit from its safe haven status when equity markets fall, USD/JPY retreated further from this past week’s 114.86 high to drop below the key 114.00 level once again, and then hitting a low well below 113.00 before bouncing on Monday. From a broader price perspective, USD/JPY spent most of the first half of February plunging precipitously from above 121.00 all the way down to a new long-term low below 111.00, largely due to falling crude oil and stock markets fostering a “risk-off” flight back to the safe havens of gold and the yen. Though equities have recovered most of the losses from earlier in the month, any major return of market volatility may likely boost the yen even further, which could send USD/JPY to new lows. Declines for the currency pair could be even further pronounced if the US Federal Reserve continues to be seen as increasingly dovish and unlikely to raise interest rates again this year, which could further weigh on the US dollar. In this event, sustained pressure under the noted 114.00 level could begin to target further downside objectives at the key 110.00 and 108.00 support levels.

GBP/USD

james-chen-GBPUSD-2016-02-22

GBP/USD spent last week mostly in bearish mode, falling once again to hit a major support area around the 1.4250 level, before plunging on Monday due to the prospects of UK potentially leaving the European Union. This drop extends the currency pair’s retreat from its 50-day moving average and the 1.4500 level. In the process, this retreat has erased all of the gains made during the upside pullback of late January and early February, and could be the precursor to a continuation of the longstanding bearish trend. Despite diminished expectations of another Federal Reserve rate hike having pressured the US dollar from the beginning of February, the greenback rebounded in the past week. Perhaps even more vital to GBP/USD’s outlook than the dollar’s frequent gyrations due to shifting Fed expectations, however, may be the persistently weakened state of the British pound. This weakness stems partly from concerns over the noted “Brexit”, and partly from an increasingly dovish Bank of England that was previously expected to begin its own monetary tightening cycle at some point following the initiation of the Fed’s rate hike in December. These expectations have since diminished dramatically, and even reversed to accommodate the potential for a rate cut, given recent concerns over weak economic growth, financial market instability, and low inflation. As long as the Bank of England maintains a monetary policy stance that is consistently seen as even more dovish than the Fed’s, the underlying bearish trend for GBP/USD should continue. Despite the noted upside pullback in late January and early February, price action since then has leaned towards a potential resumption of the entrenched downtrend. With any sustained trading below 1.4250 support, the next major downside target remains at the 1.4000 psychological support objective, followed further to the downside by the 1.3600 support level, last touched in early 2009.

GBP/JPY

james-chen-GBPJPY-2016-02-22

In line with the bearish moves for both GBP/USD and USD/JPY, the GBP/JPY cross currency pair spent last week resuming its freefall by dropping well below 164.00 once again, as the pound fell sharply against most major currencies and the yen rallied on a return of risk aversion. Monday saw a further plunge below 160.00 support on concerns over the UK leaving the European Union. This continuous pressure on the pound combined with the safe haven yen being boosted by intermittent fear and volatility in global markets, has weighed heavily on the GBP/JPY currency pair. Within the last two weeks, GBP/JPY dropped down to multi-year lows and major psychological support around the 160.00 level after a prolonged period of precipitous falling. Despite the fact that the currency pair rebounded soon after dropping to 160.00, the current drop below this level is a significant bearish indication of further potential losses. With any continued equity market volatility that sustains a “risk off” market sentiment, further yen buying could result. When coupled with a persistently pressured British pound, this could lead to further GBP/JPY trading below the noted 160.00 support. In this event, the next major downside targets are at the 156.50 and then 154.00 support levels.

EUR/USD

james-chen-EURUSD-2016-02-22

EUR/USD spent last week in a sharp slide that culminated in a dip below key support at the 1.1100 level. This dip turned into a bona fide breakdown on Monday, as fears of a “Brexit” weighed on the euro. In the process, the currency pair has hit more than a two-week low. For much of the first half of February, EUR/USD had risen sharply as the dollar weakened on significantly lowered expectations of another Federal Reserve rate hike due to global economic growth concerns and financial market turmoil, among other factors. During the past week, however, the dollar made a rebound while the euro came under increased pressure early in the week after European Central Bank (ECB) President Mario Draghi made comments indicating a strong willingness and readiness to implement additional monetary easing measures. These comments further weighed on the shared currency, pushing the EUR/USD pair back down to key support at the noted 1.1100 level. Since its 1.0500-area lows in early December, EUR/USD has been trading within a rising parallel trend channel. The prior week’s 1.1375 high reached strong resistance at the top of that channel, as well as the underside of a major uptrend line extending back to the sub-1.0500 lows back in March of last year. Having retreated sharply from that resistance since late last week and currently having dropped below the 1.1100 level, EUR/USD has reached a critical juncture. Despite recent concerns over the Fed’s somewhat dovish policy stance following December’s rate hike, the ECB continues to be squarely embedded in easing mode. This contrast between the two central banks, if it continues, may be viewed as a bearish indication for EUR/USD. In the event of sustained trading below the 1.1100 level, the next major downside target remains at the major 1.0800 support level.

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