Yesterday, the Federal Reserve suggested the possibility for a rate hike before the end of 2017 and said it will begin to roll off its stimulus program in the coming month, which pushed the USD Index to almost 92.50. What impact did this increase have on EUR/USD, GBP/USD and USD/CAD?

In our opinion the following forex trading positions are justified - summary:

• EUR/USD: short (a stop-loss order at 1.2250; the initial downside target at 1.1466)
• GBP/USD: short (a stop-loss order at 1.3773; the initial downside target at 1.3317)
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

On Tuesday, we wrote the following:

(…) EUR/USD remains in the orange resistance zone – below the 2010 and July 2012 lows (in terms of monthly closing prices), which suggests that the 2017 upward move could be a verification of the earlier breakdown below these levels. This scenario is also reinforced by the current position of the long-term indicators – they increased to the highest levels since April 2014. Back then, such high readings of the CCI and Stochastic Oscillator preceded bigger move to the downside, which suggests that we may see a similar price action in the coming week(s). Therefore, even if EUR/USD moves a bit higher in the very short term, we believe that another significant move will be to the downside.

Yesterday, we added:

(…) even if the pair extends today’s upswing it could be nothing more than another verification of the earlier breakdown.

As you see on the daily chart, the situation developed in line with our assumptions and EUR/USD declined after an increase to the brown resistance line. Thanks to Wednesday’s drop the exchange rate slipped below the early August peak and reached the lower brown line. Although this support could trigger a rebound later in the day, we should keep in mind that the sell signals generated by the indicators remain in place, supporting further deterioration.

On top of that, the medium-term indicators also generated sell signals, increasing the probability of another downswing in the coming days.

Taking all the above into account, we believe that short (already profitable) positions are justified from the risk/reward perspective. How low could the pair go if we see a breakdown under the brown support line? In our opinion, the initial downside target for currency bears will be around 1.1508, where the 38.2% Fibonacci retracement based on the entire April-September upward move is.

Very short-term outlook: mixed with bearish bias
Short-term outlook: bearish
MT outlook: bearish
LT outlook: mixed

Trading position (short-term; our opinion): Short positions (with a stop-loss order at 1.2250 and the initial downside target at 1.1466) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

GBP/USD

Quoting our last commentary on this currency pair:

(…) the recent increases took GBP/USD to very important resistance zone created by the very long-term red declining resistance line based on the July 2014 and June 2016 peaks (marked on the weekly chart), the red increasing resistance line based on the previous highs (seen on the daily chart) and the area between the 161.8% and 173.2% Fibonacci extensions.

Additionally, the CCI and the Stochastic Oscillator generated sell signals (while the RSI is very close to doing the same), increasing the probability of reversal and declines in the coming days.

From today’s point of view, we see that currency bears pushed GBP/USD lower as we had expected. Although the exchange rate moved higher yesterday, the combination of the above-mentioned resistances stopped increases, triggering a pullback. As a result, the pair came back under the very long-term red declining resistance line based on the July 2014 and June 2016 peaks (marked on the weekly chart) and the orange resistance zone (seen on the daily chart and reinforced by the red increasing resistance line based on the previous highs), invalidating the earlier tiny breakouts.

Taking this bearish development and the sell signals generated by the indicators into account, we believe that opening short positions is justified from the risk/reward perspective.

How low could the pair go in the coming days? We think that the best answer to this question will be the quote from our yesterday alert:

(…) If (…) the exchange rate moves lower from current levels, we’ll see a drop to around 1.3266-1.3291, where the 38.2% Fibonacci retracement based on the August-September upward move and the August high are.

Very short-term outlook: bearish
Short-term outlook: mixed with bearish bias
MT outlook: mixed with bearish bias
LT outlook: mixed

Trading position (short-term; our opinion): Short positions (with a stop-loss order at 1.3773 and the initial downside target at 1.3317) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

USD/CAD

Looking at the above charts, we see that USD/CAD extended gains after the rebound from the upper border of the green support zone and the 50% Fibonacci retracement, which resulted in a climb to the previously-broken long-term blue support line based on the September 2012, September 2013 and June 2014 lows (seen more clearly on the monthly chart). Although the recent upswing could be a verification of the earlier breakdown under this line, the current position of the monthly and weekly indicators (the latter already generated buy signals) suggests that currency bulls will extend gains in the coming weeks.

Will the very short-term chart confirm this scenario? Let’s examine the daily chart and find out.

From the very short-term perspective, we see that USD/CAD extended gains, which suggests that we’ll see the realization of the bullish scenario from our Monday alert:

(…) If (…) the exchange rate from current levels, we’ll likely see an increase to the resistance area (marked with the yellow ellipse) created by the 23.6% Fibonacci retracement (based on the entire May-September downward move), the orange declining resistance line and the July lows in the coming days.

Nevertheless, please keep in mind that that the current position of the CCI and the Stochastic Oscillator suggests that the space for increases may be limited and reversal in the coming week should not surprise us.

Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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