Yesterday, the greenback moved sharply lower against the other major currencies after the Institute of Supply Management reported that its non-manufacturing purchasing manager's index dropped to 51.4 in Aug, disappointing market participants. Tanks to this decline, EUR/USD invalidated earlier breakdown and climbed to last week’s high. Where will the exchange rate head next?

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

• EUR/USD: long (stop-loss at 1.1056; initial upside target at 1.1304)
• GBP/USD: short (a stop-loss at 1.3579; initial downside target at 1.2519)
• USD/JPY: short (stop-loss at 106.04; initial downside target at 100.47)
• USD/CAD: short (stop-loss at 1.3237; next downside target at 1.2782)
• USD/CHF: short (stop-loss at 0.9935; initial downside target at 0.9630)
• AUD/USD: none

EUR/USD

On the daily chart, we see that invalidation of the breakdown under the upper border of the red declining trend channel triggered a sharp increase yesterday. With this move EUR/USD broke above the upper line of the blue consolidation and closed the day at the highest level since Aug 25. Additionally, buy signals generated by the indicators remain in play, supporting currency bulls. Taking all the above into account, we believe that what we wrote yesterday is up-to-date:

(…) another sizable upward move will be more reliable if the pair climbs above the upper border of the blue consolidation. In this is the case, the exchange rate will extend gains and increase to around 1.1335, where the previously-broken lower border of the blue rising trend channel currently is. If it is broken, we’ll see a test of the brown resistance line in the following days (currently at 1.1351).

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

Trading position (short-term; our opinion): Long (already profitable) 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.

USD/JPY

Last Thursday, we wrote the following:

(…) USD/JPY broke not only above the yellow resistance zone, but also above the 50% Fibonacci retracement, which is a positive signal that suggests a climb to the next retracement around 104.44 (…) in the coming days. Nevertheless, we should keep in mind that the CCI and Stochastic Oscillator are overbought and very close to generating sell signals. Additionally, the RSI approached the level of 70, which suggests that reversal may be just around the corner.

From today’s point of view, we see that the situation developed in line with the above scenario and USD/JPY reversed after an increase to our upside target. As you see, the combination of the 61.8% Fibonacci retracement and the orange declining resistance line triggered a decline, which took the exchange rate below the previously-broken yellow zone. Earlier today, the pair slipped to the support area created by the mid-Aug highs and rebounded slightly. However, in our opinion, as long as sell signals are in play another move to the downside is very likely. If this is the case, and USD/JPY moves lower once again, the initial target will be around 100.47.

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

Trading position (short-term; our opinion): Short (already profitable) 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.

USD/CHF

Quoting our Friday’s alert:

(…) the exchange rate invalidated earlier breakdown under the orange zone, which in combination with sell signals generated by the indicators suggests further deterioration in the coming days. If this is the case, the first downside target would be around 0.9710, where the 50% Fibonacci retracement based on the recent upward move currently is.

Looking at the charts, we see that currency bears pushed the exchange rate lower as we had expected. With yesterday’s drop USD/CHF not only declined sharply to our initial downside target, but also dropped below it, which suggests a test of the blue rising support line based on the May and Jun lows (currently around 0.9635) in the coming day(s).

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

Trading position (short-term; our opinion): Short positions (which are already profitable as we opened them when USD/CHF was trading around 0.9800) 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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