The combination of dovish comments by Fed officials and disappointing Chinese data (which showed that the annual rate of inflation slowed to 1.6% in Sept) pushed the USD Index to a fresh Oct low of 94.47. What impact did this decline have on the euro, yen and Swiss franc?

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

• EUR/USD: short (a stop-loss order at 1.1887; the downside target around 1.0938)
• GBP/USD: none
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

Looking at the weekly chart we see that EUR/USD extended gains and broke above the long-term red declining resistance line. Although this is a positive signal, which suggests further improvement, we should keep in mind that the exchange rate still remains under the orange resistance zone (reinforced by the bearish evening pattern). In previous weeks this area was strong enough to stop currency bulls and trigger a pullback, which suggests that the space for further rally is limited.

Having said that, let’s find out what impact did this increase have on the very short-term picture.

From this perspective, we see that EUR/USD broke above the barrier of 1.400 and the 50% Fibonacci retracement earlier today. Despite this increase, the breakout is unconfirmed and we think that as long as there is no daily closure above these levels further rally is not likely to be seen. Additionally, the current position of the indicators (a negative divergence between the CCI and the exchange rate, the Stochastic Oscillator above the level of 80) suggests that reversal is just around the corner.

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

Trading position (short-term; our opinion): Short positions with a stop-loss order at 1.1887 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

The medium-term picture hasn’t changed much as the exchange rate is still trading in the consolidation under the blue resistance line.

Today, we’ll focus on the very short-term changes.

The first thing that catches the eye on the daily chart is a breakdown below the green support line. Taking this negative signal into account, and combining it with sell signals generated by the indicators, we think that currency bears will try to push the exchange rate to around 118.55-118.90, where the green support zone (based on the Sept lows) is.

Very short-term outlook: bearish
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.

USD/CHF

On the weekly chart, we see that an invalidation of the breakout above the orange support/resistance line and its negative impact on the exchange rate triggered further deterioration and approached the pair to the green support zone.

What impact did this move have on the daily chart? Let’s check.

On Friday, we wrote the following:

(…) USD/CHF verified the breakdown below the blue line, which resulted in a sharp decline yesterday. This negative sign triggered further deterioration earlier today which suggests a test of the lower border of the red declining trend channel. (…) the next downside target for currency bears would be around the Sept lows.

Looking at the daily chart, we see that the situation developed in line with the above scenario and USD/CHF dropped to our downside target. Nevertheless, the following days resulted in further deterioration and the exchange rate decreases with the lower border of the red declining trend channel. This means that our next downside target would be in play n the coming day(s). Finishing today’s commentary on this currency pair, please note that the current position of the indicators suggests that reversal is just around the corner.

Very short-term outlook: mixed with bearish 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
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