Yesterday, the greenback extended losses against the yen as tensions between the United States and North Korea increased after comments made by North Korea's foreign minister. In this environment, USD/JPY invalidated the earlier breakout and closed the day under 112. Will we see further deterioration in the coming days?

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

• EUR/USD: short (a stop-loss order at 1.2250; the initial downside target at 1.1466)
• GBP/USD: short (a stop-loss order at 1.3773; the initial downside target at 1.3317)
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

Yesterday, we wrote the following:

(…) EUR/USD is still trading in the orange resistance zone – below the 2010 and July 2012 lows (in terms of monthly closing prices), which suggests that the 2017 upward move could be a verification of the earlier breakdown below these levels.

Additionally, the long-term indicators remain around their highest levels since April 2014. As a reminder, back then, such high readings of the CCI and Stochastic Oscillator preceded bigger move to the downside, which suggests that we may see a similar price action in the coming week(s).

Looking at the above chart, we see that currency bears pushed EUR/USD lower (as we had expected), which resulted in a decline below the lower border of the orange resistance zone. This is a negative development, which suggests further deterioration; however, this event will turn into bearish if we see a monthly closure below this resistance zone.

Will we see such price action? Looking at the charts below, we think that it is very likely.

Why? As you see on the weekly chart, the sell signals generated by the medium-term indicators remain in cards, supporting currency bears and further deterioration. Additionally, EUR/USD extended losses below 127.2% Fibonacci extension, August and September peaks, which means an invalidation of the earlier breakouts – an important factor, which increases the likelihood of further declines in the coming weeks.

This scenario is also reinforced by the short-term picture of the exchange rate.

The first thing that catches the eye on the daily chart is breakdown under the blue support line based on the previous lows, which is the neck line of the head and shoulders formation.

Taking all the above and this bearish development into account, we believe that what we wrote yesterday remains up-to-date:

(…) EUR/USD declined and slipped under the lower border of the brown rising trend channel (….) this is a bearish development, which suggests further deterioration – especially if the exchange rate closes today’s session under this important line.

What could happen if we see such price action? Looking at the above chart, we clearly see a potential head and shoulders formation. Therefore, if EUR/USD declines under the neck line of the pattern (the blue support line based on the previous lows), we’ll see a downward move to around 1.1596, where the size of the move will correspond to the height of the formation.

However, when we take into account a drop under the lower border of the brown rising trend channel and the broader picture of EUR/USD, we think that currency bears push the exchange rate even lower – to around 1.1508, where the size of declines will be equal to the height of trend channel. Taking all the above into account, we believe that our (already profitable) short positions are justified from the risk/reward perspective.

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

Trading position (short-term; our opinion): Short positions (with a stop-loss order at 1.2250 and the initial downside target at 1.1466) 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

Looking at the daily chart, we see that although USD/JPY bounced off the red declining resistance line and the 61.8% Fibonacci retracement in the previous week, currency bulls didn’t manage to hold gained levels, which resulted in another pullback yesterday.

Thanks to this move, the pair closes Monday’s session below the red line and the 61.8% Fibonacci retracement, invalidating the earlier breakout. Earlier today, the exchange rate verified yesterday’s breakdown, which together with the sell signals generated by the CCI and the Stochastic Oscillator suggests that further deterioration is just around the corner.

If this is the case and the pair moves lower from current levels, the initial downside target will be the previously-broken yellow zone, which serves as the nearest support at the moment. If it is broken, currency bears will likely test the 38.2% Fibonacci retracement or even the medium-term green support line and the next Fibonacci retracement (currently around 110).

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed with bearish bias
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.

AUD/USD

On the medium-term chart, we see that AUD/USD moved a bit lower earlier this week, which suggests that the sell signals generated by the indicators will continue to support currency bears and lower values of the exchange rate.

Will the very short-term chart confirm this scenario? Let’s check.

From the daily perspective, we see that AUD/USD stuck in the blue consolidation around the 23.6% Fibonacci retracement. Nevertheless, taking into account the medium-term picture and the breakdown under the lower border of the purple rising trend channel, we think that further deterioration is just around the corner.

How low could the pair go? In our opinion, if AUD/USD declines from current levels, the initial downside target will be around 0.7805-0.7820, where the green support zone (created by the mid-August lows and the 38.2% Fibonacci retracement) is.

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. 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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