On Tuesday, the common currency hit a 8-week high against the U.S. dollar as the combination of the euro zone's service-sector PMI, better-than-expected retail sales and disappointing U.S. trade data weighted on the exchange rate. In reaction to these circumstances, EUR/USD approached the annual high and is currently trading in the narrow range. What’s next? Will the USD Index give us any interesting clues?

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

• EUR/USD: none
• GBP/USD: none
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: short (stop-loss order: 0.9410; initial price target: 0.9060)

AUD/USD

From the weekly perspective, we see that the overall situation hasn’t changed much as the exchange rate remain in the consolidation range. Although AUD/USD bounced off the upper green line and extended gains, sell signals generated by the CCI and Stochastic Oscillator remain in place, suggesting that another attempt to move lower can’t be ruled out.

Once we know the medium-term situation, let’s move on to the daily chart.

Yesterday, we wrote the following:

(…) the size of today’s rally corresponds to the height of the trend channel, which suggests that day traders will likely close their position in this area. If this is the case, such price action will likely result in a pullback – especially when we factor in the proximity to the resistance zone.

Earlier today, we noticed such price action as AUD/USD moved lower and dropped to the previously-broken blue support/resistance line. If it holds, we may see another increase to the resistance zone created by the Apr. 17 and Apr. 22 highs. However, if it is broken, we will likely see further deterioration and a correction to the upper line of the declining trend channel (currently around 0.9267). Taking into account the position of the indicators (the CCI and Stochastic Oscillator are overbought) and combining it with the current situation in the USD Index, we think that the latter scenario is more likely in the coming days and short positions seems to be the best choice to bet a U.S. dollar increase.

In other words the market seems to be confirming what we wrote yesterday:

(…) The AUD/USD pair moved sharply higher today and that's clearly a consequence of US Dollar's weakness - other USD-related pairs have also moved based on it. However, the USD Index itself moved to a major support level - the 2013 low and is basically right at it at the moment of writing these words. It's also at its cyclical turning point. If the USD Index is to reverse shortly, and it still seems likely, then the AUD/USD pair is likely to be impacted in a significant way, as the Australian currency has already been acting weak relative to the US Dollar. Please note that the USD Index is at its 2013 low and at the same time the AUD/USD pair is far from its 2013 high (even if we take the October 2013 high into account). That's why we think that the short position in the AUD/USD pair remains justified from the risk/reward perspective. Please note that the stop-loss level for the current position is relatively close, so of the USD Index broke below its 2013 low and the situation changed significantly, this order would shortly take you out of this trade. For now, it seems that the AUD/USD pair will move lower in the coming weeks.

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

Trading position (short-term): Short. Stop-loss order: 0.9410 and initial price target: the lower border of the blue rising trend channel (currently at 0.9060). We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

EUR/USD

Quoting our Forex Trading Alert posted on Monday:

(…) the exchange rate rebounded and approached the upper line of the consolidation (marked with light blue) in the previous week. If it holds, we will likely see a correction in the coming days (…). However, if EUR/USD breaks above this resistance line, we may see an increase to around 1.3947 or even to the March high of 1.3966.

Earlier this week, we saw such price action as the pair moved higher, broke above the upper line of the consolidation and reached the first upside target. The breakout by itself is a strong bullish signal that may trigger further rally to the annual high or even to the red resistance line (currently around 1.4017). Despite this positive event, we think that the proximity to the resistance zone (created by the previous highs) in combination with the current situation in the USD Index, may decelerate or even stop further improvement in the coming week (or weeks).

Will the sort-term picture give us any additional clues? Let’s find out.

On the daily chart, we see that the EUR/USD successfully broke above the previous highs and reached the resistance zone created by the March highs (marked with orange). As we mentioned earlier in this alert, if it is broken, the pair may climb to the long-term red resistance line (but before we see EUR/USD in this area, the exchange rate will have to break above the psychological level of 1.4000). Nevertheless, if this resistance holds, we will likely see a pullback and the downside target will be the 50-day moving average (currently at 1.3817), which stopped declines in the recent two weeks. Although the indicators didn’t give us precisely clues about the recent price moves, we clearly see that they are overbought. At this point, it’s worth noting that the RSI increased to its highest level since March. Additionally, there is a small negative divergence between the CCI and the exchange rate, while the Stochastic Oscillator remains at levels that preceded downward moves in March and also in April. All the above provide us with bearish implications and suggests that correction is just around the corner.

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

Trading position: 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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