Earlier today, the Office for National Statistics reported that retail sales rose just 0.1% in June from a month earlier, missing expectations for a 0.3% gain. Additionally, on a year-over-year basis, retail sales rose 3.6% in the previous month, also below expectations for a 3.9% increase. Thanks to these disappointing numbers, GBP/USD declined a 1-month low against the U.S. dollar and broke below an important support line. Will this event trigger further deterioration?

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

• EUR/USD: short (stop-loss order: 1.3670)
• GBP/USD: none
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

The medium-term picture remains bearish as EUR/USD still remains not only below the lower border of the consolidation, but also under the February lows. Today, we’ll focus on the very short-term changes.

Quoting our Forex Trading Alert posted on July 22:

(...) as long as there are no buy signals and EUR/USD remains below the recent lows, another move lower is more likely than not. If this is the case, the nearest support will be around 1.3436 (the 1.732% Fibonacci extension based on the April-May rally), and if it is broken, the pair will likely drop to 1.3411, where the 112.8% Fibonacci extension (based on the entire Feb-May rally) is.

Looking at the above chart, we see that EUR/USD reached the first of our downside targets earlier today. Although the pair rebounded slightly in the following hours, the size of the upswing is too small to say that the very short-term outlook has improved. In our opinion, as long as the exchange rate remains below recent lows another downswing is likely. If this is the case, currency bears will realize the above-mentioned scenario and push the pair to around 1.3411. Nevertheless, we should keep an eye on the next EUR/USD move as the current position of the indicators suggests that a pause or corrective upswing is just around the corner (on the short-term basis).

Very short-term outlook: bearish
Short-term outlook: bearish
MT outlook: bearish
LT outlook: bearish

Trading position (short-term): Small short positions (using half of the capital that one would normally use). Stop-loss order: 1.3670. The probability for the continuation of the decline is not extremely high, which is why we are not doubling the short position at the moment. We’ll do it, when the breakdown is confirmed. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

GBP/USD

In our Forex Trading Alert posted on July 18, we wrote the following:

(...) Although GBP/USD moved higher earlier this week, hitting a fresh 2014 high, the pair reversed and came back to the consolidation above the key support line created by the 2009 high. As you know from out previous alerts, an invalidation of the breakout is a bearish signal, which usually triggers a correction. (…) we should keep in mind that the RSI generated a sell signal, while the CCI and Stochastic Oscillator are very close to doing it, which suggests that we may see a test of the strength of the horizontal support line in the near future.

As you see on the above chart, the medium-term outlook has deteriorated as GBP/USD declined below the consolidation range. With this downswing, the exchange rate also dropped below the key support line created by the 2009 high, which is a bearish signal that suggests further deterioration. If the pair doesn’t invalidate the breakdown, we’ll see a drop to at least 1.6875, where the next horizontal support line (based on the Nov 2009 high) is. If it’s broken the next downside target will be the support zone created by the May and June lows (around 1.6692-1.6766).

What can we infer from the daily chart?

On Monday, we wrote the following:

(...) we are convinced that as long as there is no breakout/breakdown we won’t see another bigger move. So, where the pair head next? (…) In our opinion, the next move will be to the downside. (..) if the pair breaks below the lower border of the consolidation, the nearest downside target will be the 2009 high, and the next - the medium-term orange line. Please note that only if the pair breaks below these lines, we’ll see a correction to around June 18 low, where the size of a pullback will correspond to the height of the formation.

Yesterday, the pair reached the medium-term orange line, but as you see on the above chart, this important support line didn’t withstand the selling pressure and GBP/USD dropped below it, which triggered a sharp decline in the following hours. Taking this negative fact into account, we believe that currency bears will realize the above-mentioned scenario in the coming days.

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

Trading position (short-term): In our opinion, no positions 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.

AUD/USD

The medium-term outlook remains mixed as AUD/USD is still trading in a consolidation slightly below the 2014 high. Will the very short-term picture give us more learly clues where the pair head next? Let’s check.

Quoting our last Forex Trading Alert:

(...) the pair reached the resistance zone created by the upper line of the blue rising wedge and the 76.4% and 78.6% Fibonacci retracement levels. (...) this area stopped further improvement earlier this month. Therefore, if history repeats itself once again, we may see a similar pullback to the one that we saw on July 10 (at this point it’s worth noting that today all indicators are even higher, which increases the risk of a correction). If this is the case, the nearest support will be the green support/resistance.

On the above chart we see that although AUD/USD moved little higher and broke above the resistance zone, this improvement was only very temporarily and the pair reversed. As a result, currency bears realized the above-mentioned scenario and the exchange rate reached its downside target. If it holds, we may see a corrective upswing from here. However, taking into account the current position of the indicators and an invalidation of the breakout, we think that the next move will be to the downside. If this is the case, the initial downside target will be around 0.9359, where the bottom of the previous correction is.

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

Trading position (short-term): In our opinion, no positions 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.

Thank you.

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

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