Week Ahead: Forex Markets Analysis – EUR/USD, USD/JPY

Week Ahead: Forex Markets Analysis – EUR/USD, USD/JPY

Dollar strength has been the dominant trend as we head into the second half of the summer, with the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) starting the month at new highs.  These moves have been propelled largely by geopolitical concerns in areas like the Ukraine, Gaza, and Iraq.  Typically, the summer months tend to be market by slower price volatility, but geopolitical concerns like these can have the potential to influence short-term trends in illiquid markets.  Here, we look at the latest technical developments in the forex majors.

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EUR/USD – Euro vs. US Dollar

 

Critical Resistance:   1.3480

Critical Support:   1.3250

(Chart Source:  CornerTrader)

EUR/USD Forex Strategy:  Sell rallies into support turned resistance at 1.3480, buy dips into long-term Fib support at 1.3250.  

The medium term downtrend in the EUR/USD continues, as the pair has managed to fill cautious buy orders at 1.34.  For next week’s trading, there is very little to be seen in the way of short term support so strong bounces in the current environment are unlikely.  At the same time, the bearish move has been strong and there is the potential whipsaw event that could be triggered by profit taking at these lower levels.  From the daily perspective, we have yet to reach the 38.2% Fibonacci support in the move from 1.20 to 1.40, which is now found at 1.3250.  

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USD/JPY – US Dollar vs. Japanese Yen

 

Critical Resistance:   104.10

Critical Support:   100.80

(Chart Source:  CornerTrader)

USD/JPY Forex Strategy:  Trade the range from the bullish side, buying dips into the low 101s. Stop losses can be set below 100.80 support.\

The USD/JPY continues to consolidate in a sideways range, with support and resistance levels tightening around the 102 handle.  Consolidation patterns cannot trade permanently so traders should start to look for evidence of a breakout in either direction.  The balance of the evidence continues to favor the upside, as support at 100.80 as held on three separate occasions (creating a triple bottom).  First bull target rests at 104.10, take profits on longs if prices approach this level.  These trends have also been confirmed by recent market analysis from ForexAbode.

The USD/JPY pair seems to be opening itself to traders in ways that could present new opportunities for long term positioning.  Since this choice also marks an important gauge for the prospects in carry trades, it will be critical for traders to continue analyzing how trends develop as head head into the Fall months.  These months tend to be characterized by price trading activity that is quite different from what is seen during the summer, so it shouldn’t be long before we start to see some signs of much more sustainable moves in the USD/JPY.  Many traders will also start looking at the trending behavior that is seen in stocks, as this is another way of gauging the next likely move in the JPY and carry trading pairs.  Commonly watched markers like the S&P 500 continue to surge back toward record highs and the pullbacks so far this year have been limited.  This bodes well for the carry trade pairs, as these currencies tend to to best when market conditions are stable and the global economic environment is lacking signs of uncertainty.

Alternatively, forex traders will likely continue to use the EUR/USD as a precursor for what is likely to happen next in the Dollar denominated pairs.  Specifically, assets like the USD/CHF and the GBP/USD have seen major moves this year in areas that might not completely coincide with the price moves seen in the EUR/USD.  Both sides can’t be right, so we will need to see if the GBP/USD takes its direction from the EUR/USD — or the other way around.  Given the positive state of US jobs numbers and the surging stock market, it is much more likely that recent behavior in the EUR/USD is the better indicator of the current state of the market.