Earlier today, the Institute of Supply Management showed that its non-manufacturing PMI rose to 56.7 in January, beating analysts’ expectations for an increase to 56.3. In response to these numbers, the U.S. dollar moved higher against its Australian counterpart, which pushed AUD/USD to the medium-term support line once again. Will we see a verification of the breakout or rather the last stop before new lows?

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

• EUR/USD: long (stop loss order at 1.1310)
• GBP/USD: none
• USD/JPY: none
• USD/CAD: short (stop loss order at 1.2645)
• USD/CHF: none
• AUD/USD: none

EUR/USD

The medium-term picture hasn’t changed much as and invalidation of the breakdown below the 61.8% Fibonacci retracement and its positive impact on the exchange rate are still in effect. Having said that, let’s focus on the daily chart.

Looking at the daily chart, we see that although EUR/USD moved lower earlier today, the pair is still trading above the previously-broken red declining support/resistance line and the upper line of the consolidation (marked with blue). This suggests that as long as there is no invalidation of the breakout above these levels, another attempt to move higher is likely. In this case, the initial upside target would be the resistance zone created by the Jan 22 high and the previously-broken Nov 2005 low.

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

Trading position (short-term): Long positions with a stop loss order at 1.1310 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.

USD/JPY

The situation in the medium-term hasn’t changed much as USD/JPY is still trading between the last month’s high and low, under the 61.8% Fibonacci retracement.

Will the daily chart give us more clues about future moves? Lets check.

On Friday, we wrote the following:

(…) taking into account an invalidation of the breakout above the upper border of the previous consolidation (marked with blue), it seems that the pair will test the Jan 21 low of 117.17 (the lower line of the current consolidation).

From today’s point of view, we see that the situation not only developed in line with the above mentioned scenario, but USD/JPY dropped under the lower border of the consolidation. As you see this small deterioration was only temporary and the pair came back inside the formation, invalidating earlier breakdown. Taking this fact into account, and combining it with buy signals generated by the Stochastic Oscillator and CCI, it seems to us that the exchange rate will increase to around 118.65-118.80, where the recent highs are. Nevertheless, even if we see such price action, it won’t change the very short-term picture, which will remain mixed.

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

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.

AUD/USD

From this perspective, we see that AUD/USD rebounded, invalidating earlier breakdown below the Jul 2009 lows. This is a bullish sign, which suggests that a trend reversal might be just around the corner. In our opinion, this signal will be even more bullish if we see a weekly close above these levels.

Having said that, let’s take a closer look at the daily chart and find out what impact did this increase have on the very short-term picture.

Quoting our last commentary on this currency pair:

(…) the exchange rate approached the support level based on the Jul 2009 lows. If …) it is broken, the next downside target would be around 0.7621, where the lower line of the formation is.

Yesterday, AUD/USD moved sharply lower, breaking below the brown support line and the lower border of the consolidation (marked with blue). With this downswing the exchange rate approached our downside target, but then rebounded, invalidating earlier breakdown. Although this is a bullish signal the pair declined earlier today and slipped to the brown support line once again. If it withstands the selling pressure, we’ll see another rebound and an increase to at least the upper line of the consolidation (around 0.7905. However, if it is broken, AUD/USD will test yesterday’s low. Which scenario is more likely? Taking into account the current position of the indicators and the medium-term picture, it seems that we’ll see another attempt to move higher in the coming day(s).

Very short-term outlook: mixed
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

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