In the last two weeks there has been a notable improvement in the prospects of some of the key major currencies. Since the market has had a chance to digest the latest easing actions of the ECB on 22nd January, the US dollar has begun to underperform against the euro, sterling and the yen. Perhaps it is a thought that all the information is now out there and this has meant that astute traders see this as a chance to cover short positions on a market (EUR/USD) that is hugely weighted towards shorts. However, we are seeing tests of key levels on some of these pairs, levels that if they are breached could result in a sharper correction on the dollar.
The Dollar Index (.DXY) has been leaving a series of lower highs in the past couple of weeks and is now on the brink of breaking its first uptrend (which is a 6 week uptrend – green on the chart below). Interestingly this would follow the euro which has already broken a 6 week downtrend in the past couple of days. However the breakdown of the 6 week uptrend would open the early January congestion support band around 92.0 which is c. 2% below the current level of the dollar.
This could happen because we have the dollar which is moving to test some key levels on some of the major forex pairs now:
Euro/Dollar has already broken its 6 week downtrend and despite the best efforts of the ECB to scupper the recent recovery, the bulls have returned strongly today and have used the support around $1.1300 as the basis for a spring-board higher. Interestingly, the high of the 3rd Feb came at $1.1532 which was just under the initial resistance band at $1.1540 (which marks a resistance band of around 100 pips that was formed just prior to the ECB QE announcement). A move back above $1.1530 would re-open this resistance band which is between 1.5% to 2% higher from current levels.
Cable is following the euro higher. The rate is also now increasingly close to a completion of a base pattern (needs above $1.5270 to complete). This pattern would imply a rebound towards the key resistance area between $1.5550/$1.5600 which at current levels would imply around 2% upside. A close above $1.5270 is needed to trigger this move (which would also start to breach the 7 month downtrend.
Dollar/Yen continues to pressure towards the downside now the 117.20 support band of the old intraday range has now been broken. Despite near term fluctuations there is a bearish drift that is continuing. Now the rate is trading consistently under the 23.6% Fibonacci retracement level (117.90) of the 105.18/121.84 bull run, this should now mean that Dollar/Yen will move towards the 38.2% retracement around 115.50. A move back towards 115.50 is around 2% from current levels. A close below 116.65 would confirm this correction is on.
Finally despite the rate cut by the Reserve Bank of Australia, the Aussie dollar has rebounded strongly in recent days (helped higher certainly by the cut in the Reserve Requirement Ratio by the People’s Bank of China). The Aussie dollar has been close to forming base patterns in the past and often during this big sell-off there have been a number of false upside breaks. However the intraday hourly chart shows that 0.7850 is a key resistance now (which was an old key low in the sell-off). If this level is breached it would form a 6 day base pattern which would imply a rebound back towards the resistance around 0.8000 which would be around 2.0% higher from current levels. A close above 0.7850 would complete this base pattern
So there is a theme amongst several of the major pairs that suggests a 2% move away from the dollar is possible. There are several key levels that need to be breached to open this move, but the potential for this near term dollar correction to continue is certainly there.