Price activity has shown some significant changes in the last few weeks, as forex markets continue to position for end-of-year. It is important to take a look at some of the technical price activity to see if there are discrepancies between what is actually happening in the markets relative to the underlying fundamentals. One of the most disjointed currency pairs can be seen in the EUR/USD, which is closing at its weekly highs, despite strong economic data out of the US and official comments from the ECB’s Mario Draghi which have suggested that inflation rates in the Eurozone are likely to remain depressed well into 2015. When we take this combined with the fact that the ECB recently reduced interest rates to new all-time lows, those still bullish on the currency should continue taking profits on long positions given the fact that we are now trading at elevated levels.
Forex markets are now trading at critical inflection points, with most investors now forced to position in holiday-thinned trading conditions into the final weeks of the year. When these types of conditions are in place, there is always the possibility that currency valuations could undergo heightened volatility, as there are fewer traders in place to take both positions (buy and sell) in this environment. For these reasons, it is important to trade with a forex broker that has superior liquidity positions, as there is a reduced possibility for slippage.
Price Action – EUR/USD:
“Prices reversed sharply after hitting post-NFP lows at 1.3620,” said Eugene Wong, currency analyst at FXBrokerSearch , which offers information for traders looking to compare spreads and other criteria offered by forex brokers. “Prices are now on place to close above the 1.37 handle, which is actually where they were before the employment report was released.” Prices remain well above recent averages, and this does suggest a need to revert lower in the EUR/USD. But a break of support at 1.3620 will likely accelerate losses.
Price Action – USD/JPY:
Next we look at the USD/JPY, which will continue to be influenced by diverging policy actions by the US Federal Reserve and the Bank of Japan. The Yen has been one of the weakest currencies this quarter in forex markets, so it makes sense to look at the actual price behavior to see how much longer this uptrend in the USD/JPY can continue.
The USD/JPY has made a strong rebound after failing at 103.40 resistance. Prices dropped all the way below 102 before this rally was seen. But the bias remains cautiously bullish unless prices are able to show a break (and daily close) above this upper range level. Short term traders should look to sell into this area, but keep stop losses tight because an upside break of 103.40 will accelerate gains.
Price Action – GBP/USD:
Last, we look at the GBP/USD which is being driven largely by inflation expectations and the changing policy expectations at the Bank of England. The British Pound has been one of the best performers in the last few months, showing strong gains for the year as well. But when we look at the chart activity, there is some reason for bulls to be cautious at current levels.
The GBP/USD is showing a short term double top formation, and this is an early indication that prices are now rolling over after forming a major top. The confirmation of this will come if we see prices fall below support at 1.63, as this will then target market valuations that are roughly 100 points lower. An upside break of 1.6350 will take pressure off the downside.