23/10/2014: The dollar is back on track but still needs confirmation

Forex markets have been extremely fickle in the pas few weeks. There has been a distinct lack of definitive direction and subsequently there have been several false dawns that have subsequently seen a complete about turn once more. In the past 24 hours we have seen some key near term forex levels tested and broken. In the normal course of events I would be happy to go with the breakout. However the volatility and uncertainty that has been through the markets in recent times leaves me with little conviction and a fair degree of reticence.

Let’s start with the euro. Yesterday EUR/USD broke below the key support at $1.2700. This has been a key pivot level in the near term and the breach of support now means that it has turned into resistance. The subsequent move put pressure on $1.2604 support (which I would expect to continue). However the euro has now rallied following key data releases this morning. Can the improvement in German and subsequent Eurozone flash manufacturing PMI be enough to stop selling pressure taking over the euro lower? Improving Spanish unemployment is also a boost, however France remains the sick man of the major Eurozone economies. It is difficult to say whether the first sign of good news from Germany is a game changer, but for now I would still be inclined to see any rebound towards $1.2700 as a chance to sell on Euro/Dollar. The euro has rallied 70 pips through the morning, but if the deteriorating technical outlook has any say in the direction, the rally should just be viewed as a selling opportunity for further pressure on $1.2600 and the likely full retracement to $1.2500 again.

(As an aside, with Euro/Dollar and Dollar/Swiss almost perfectly inversely correlated, the equivalent of a $1.2700 breach on Euro/Dollar is the move above 0.9480 on Dollar/Swiss. Therefore, any rebound towards this 0.9480 pivot level should also be seen as a chance to buy Dollar/Swiss.)

Cable has completed a head and shoulders top pattern on the intraday hourly chart today. The failure of the support around $1.6020 came after UK retail sales missed expectations. GBP/USD has subsequently spent much of the morning trading below the support. Looking at the deteriorating hourly momentum studies and moving averages this looks to be a move that should be backed now. The one caveat would be that there is a series of US data this afternoon (jobless claims and flash PMI) which could disrupt the decline. Once again though I see this breakdown as genuine (similar to the euro) and would be inclined to use any data related bounces in Cable as a chance to sell. A close below $1.6020 tonight would confirm for me the ensuing weakness and a full retracement back towards the $1.5873 key low would be likely.

Cable   23102014

Dollar/Yen has also been toying with a key near term level today. The resistance at 107.50 has become a neckline for a head and shoulders reversal and today the move above it has suggested that the dollar bulls are ready to regain the initiative again. I would say that I would like to see a confirmation of consistent trading above the resistance today (with a close above 107.50 also preferable). In light of the past 3 days on Dollar/Yen all ending up with particularly uncertain daily candlestick patterns, I am concerned about calling this one too soon. Perhaps tomorrow then I will be able to provide more clarification, butt he signs are increasingly positive.

Finally in the improving dollar related plays we have seen gold fall back below its medium term breakout resistance turned support at $1240.60. This is a blow to the bulls and the slide in the price over the past couple of days is of increasing concern. However, all is not yet lost for the gold bugs in this recovery. The key support is at the reaction low at $1231.50 and whilst this higher low remains intact the outlook remains positive for the medium term.

So what has all this meant for the Dollar Index. Clearly the index has been pushing higher in the past few days, however whilst the downtrend channel has been breached there needs to be a move above the reaction high at 86.01 to confirm the bullish breakout. This is yet to be seen and until it has been, then signs of dollar strength may need to be taken with a caveat.

DXY   23102014

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