The last few days has seen the dollar come under some corrective pressure. It is fairly clear that the Federal Reserve is the only major central bank that is moving towards a tightening of monetary policy in 2015. This should drive continued dollar strength. However signals from the FOMC rate setting committee suggests that the decision will be driven by the economic data. In recent days, the economic data has not been all that great and as I argued yesterday, there is a link between the economic data and the market reaction on fore major such as EUR/USD. Despite this, I see this ass all near term noise and volatility. However, this volatility is about to give us some great opportunities for some medium term short positions on the euro, sterling and Aussie against the US dollar.
Disappointing data such as Non-farm Payrolls and both ISM Manufacturing and Non-Manufacturing have impacted negatively on the dollar. However it was interesting to see that as the market settled, the dollar strength began to resume once more. This has turned around in the last few days as Retail Sales, Industrial Production and subsequently the Fed’s own Beige Book have impacted dollar sentiment. Ultimately, if FOMC voting member Jeffery Lacker is anything to go by then there is an appetite on the committee to hike rates this summer, and potentially as early as June (which I do not see happening, I think September or more likely October at the earliest).
This, coupled with some strongly negative longer term outlooks on forex majors such as EUR/USD, GBP/USD, AUD/USD would suggest that rallies will continue to be seen as a chance to sell. And it is on these pairs that I see great opportunity in these recent rallies.
Technical rallies can be difficult to measure in terms of where they are likely to peter out. In the last 24 hours we have seen key resistance levels on both EUR/USD ($1.0712) and AUD/USD ($.07740) broken. However, the strength of the negative trends on these pairs would suggest to beware of chasing higher and more specifically trading against the trend (which I see as incredibly risky).
So what are the key areas to look for selling opportunities as these technical rallies have taken hold? I have used four hour charts on each pair to show you where I see the opportunities could arise.
EUR/USD may have broken through the old low at $1.0712 but there are now key overhead pivot levels ahead. There are two key levels at $1.0800 and $1.0900 both of which have provided key turning points in the last few weeks. Any move into this band would be where the bears would be starting to consider new positions. The selling into strength outlook would remain viable until a breach of the key resistance around $1.1100.
GBP/USD is slightly more advanced in its technical rally than the euro, but it is undeniable that there is a huge resistance between $1.4950/$1.5000. This has been in place for several weeks and looks to time and again be the key resistance area before the sellers resume control. There was a spike on cable on the day the FOMC surprised with an apparently slightly dovish stance, however it would need a move above $1.5200 to really suggests there was anything significant in the rally.
The Aussie dollar rallied strongly today on the better than expected Australian employment data, which has pulled AUD/USD above the key near term pivot level at $0.7740. However once more, this looks to be more of a consolidation range than any sustainable rally. Furthermore, the outlook of the Reserve Bank of Australia has been to suggest there are potentially further rate cuts in future months ahead. This should be seen as a good chance to sell. The sellers have continually returned to engage downside pressure on AUD/USD in the $0.7850/$0.7900 band in the past few months.