FX Land – A Look At The Technical Landscape

Consensus is growing that the 'risk-on trade' has gotten ahead of itself in anticipation of another round of QE; setting up a "buy the rumor, sell the news" scenario. This looks very possible due to the excessive bullish sentiment across most asset classes reaching thresholds often seen prior to a reversal.

Over the course of the past two weeks the Dollar has showed signs of stabilizing, which could be confirmed if market participants take off risk after the Fed's announcement, however; the pause in downward momentum could be just that – a pause (consolidation). If the result after the pause is another thrust lower, provided how heavily everyone is betting against the Dollar, it would seem likely such a move would be the final leg before finding a meaningful bottom.

EURUSD – There is potential for a 4th-wave triangle, and a breakout of a fully developed pattern could take the Euro up to a very important downtrend line extending back to the peak in 2008. If the 4th-wave triangle comes to fruition, in accordance to Elliot Wave Principle, the thrust higher will represent the fifth, and ultimately, the final leg up since the June low. It would also satisfy an a-b-c corrective pattern. However, before reaching that conclusion, we must remain flexible; allowing for the possiblity that we have already seen the peak of the rally with ther recent high representing the end of a C wave. This week is likely to go a long ways towards validating either scenario.

 

GBPUSD – Currently this pair is testing a 16-month trend-line extending back to August of 2009, after bouncing sharply last week off the 50-day SMA/EMA and a 5-month uptrend line.The two trend-lines are quickly converging on one another, and thus put Sterling in a make or break situation. A 3-month triangle is also in the works with the apex falling near the convergence of the two before mentioned trend-lines.

AUDUSD – The Aussie broke a steep channel back on 10/19 after being rejected at the key psychological level of parity, but since then has become rangebound. At this juncture, it is unclear as to whether this will turn out to be a topping pattern, or a consolidation before making another attempt to blast through parity.

USDJPY – This has clearly been the weakest link amongst the majors. The close this past week was below the previous all-time low made back in 1995. Looking at the historical picture – the Dollar has been in a downtrend versus the Yen since the end of the Bretton Woods system back in 1971. As the weakest pair on the board  I would like to see selling pressure in the Yen accompany any broad based rally in the Dollar.

Bottom line: There aren't any distinctive set-ups before Wednesday, but afterwards the muddy waters should clear up, providing solid risk/reward opportunities going forward.