The central issue for global forex markets this year will be whether the once mighty US dollar will continue to hold its status and position as the currency of first reserve. If so, then trading in the forex markets will remain much as before but should this become the dominant issue, and the US dollar lose this status, then trading in currencies will become a lottery and the following analysis become irrelevant.
We start with the dollar index on the weekly chart where we are seeing a strong recovery for the US dollar this week and the index is now approaching several key areas as we break above the 80 region to trade at time of writing at 80.94. The first key area is the 40 week moving average at 81.601 and if breached should open the way to a move towards the deep resistance which now begins at 82.86 and extends all the way through to 88 and beyond. This is a heavy area of price congestion spanning almost one year and it will take a monumental effort to breach but despite this the technical picture is beginning to look increasingly strong. Moreover, with the 9 week ma now crossing the 200 week ma, and with the 14 week likely to follow suit, if these combine with a breach of the 40 week above, then this will complete the strong technical outlook. Turning to the individual pairs here is my analysis based on the weekly charts.
The euro is coming under increasing pressure and finally broken through the 40 week ma to the downside now looks set to fall further, particularly if this move holds. We can expect to see a test of the low of USD1.2587 last seen in August 2010 in due course and if this is breached then we may even see the eurodollar plummet towards USD1.1876 in due course. All four moving averages are now beginning to weigh heavily, particularly the 9 week and 14 week moving averages, with 200 week having presented an immovable barrier at the USD1.40 level. From a fundamental perspective concerns over European debt levels continue with fears of contagion ever present and any hint of a default (Spain, Portugal or even Belgium!) will herald a collapse.
The pound dollar continues to operate in a channel between USD1.54 to the downside and USD1.60 to the upside. At present on the weekly chart we have the 40 week moving average providing a barrier to the downside and the 9 and 14 week moving averages capping any attempt to rise. For any sustained move we need to see a breach of these levels and technical indicators and, at present, any breakout seems likely to occur to the downside. Any move below USD1.5285 should open the way to a re-test of USD1.50 in due course and should we see renewed dollar strength (as expected) we may even see cable push down to re-test the USD1.45 region in due course.
An interesting picture for the usd/jpy on the weekly chart which appears now to be re-basing around the 80 to 81 region and, indeed, on this week’s price action we could even be left with a bullish engulfing candle suggesting a rise in the dollar yen as a result. If the price of today holds above the 9 week moving average then we could see the pair push higher next week and move towards the 84.40 region in the early part of the week, with a possible run towards 85 and beyond in due course.
An interesting technical picture is developing on the usd/chf following the sharp decline in the pair over the last 6 months, which has seen it fall from a high of 1.1731, down to today’s level at 0.9645 – almost a 50% retracement. If today’s price action holds then we could end up with a bullish engulfing candle on the weekly chart and a strong signal of a longer term buy and hold trade with a potential recovery and move higher in due course. However, the key areas are as follows: first, a hold above the 9 and 14 week moving averages in the 0.9750 area, followed by a break and hold above parity which should then provide a strong platform of price support for a sustained move higher in due course. However, I must stress this is a relatively high risk trade and should be treated with caution at this stage.
Again an interesting picture on the weekly chart with dollar strength returning and creating a bearish engulfing candle as a result which could signal a retracement in the recent longer term bull rally, provided we see a break below both the 9 and 14 week moving averages in the 0.9900 area. Once below we could see a re-test of the 0.9500 area and possibly even a deeper move back towards 0.9366 in due course.
The usd/cad has finally broken and held below parity after a sustained period of sliding lower and weighed down by all four moving averages of the weekly chart now looks set to capitulate and move even lower with increased momentum. As such we could see a re-test of the 0.9500 area last seen back in late 2007 in due course.