After struggling in consolidation for most of the week, dollar’s rally took off again towards the end as boosted by strong employment data from US. The greenback ended the week as the strongest currency while yen closely followed. European majors were broadly sold off. Indeed, Sterling was the weakest major currency as data pointed to slowdown in the recovery. Also, there were talks that BoE’s tightening pace could be much slower than Fed’s. Euro recovered against Sterling and Swiss Franc as ECB president Draghi downplayed the target of balance sheet expansion in the post meeting conference, which triggered some short covering. Meanwhile, commodity currencies were mixed as partly supported by rebound in equities.
Technically, dollar survived the test from non-farm payroll and should maintain momentum in near term. There is still much room for the greenback to sustain it’s recent rally. EUR/USD, currently at around 1.25, could head to 1.2042 key support and might only get some support below 1.21. USD/CHF, currently at around 0.96, would likely have a test on 0.9971 key resistance. GBP/USD, current at around 1.6, should target fibonacci level at 1.5721. The question is, USD/CAD is close to key resistance of 1.1278 and AUD/USD is close to fibonacci level at 0.8544. There is risk for dollar to pull back against these two commodity currencies.
Overall, the dollar index breached 61.8% projection of 72.69 to 84.75 at 86.35 last week and momentum remains strong. Based on current momentum, dollar index would likely take out 88.70 resistance. But, from a longer term perspective, the real test is 89.62 cluster resistance level, which is close to 38.2% retracement of 121.02 to 70.69 at 89.91. The strong support as seen from 55 months EMA since 2012 is certainly a sign of underlying strength. But clear break of 89.62/91 is needed to confirm establishment of a long term up trend. Otherwise, the index would just be in range trading. At this point, we’d favor an eventual break out.
Meanwhile, a key development to note is in sterling. GBP/USD finally resumed recent down trend from 1.7190 and took out 1.6 handle last week. EUR/GBP’s rebound last week was an early sign of trend reversal ahead of 0.7755 key support zone. The development in EUR/GBP would be crucial in deciding whether GBP/USD’s fall would accelerate. GBP/CAD failed to sustain above 55 days EMA and risk of near term reversal is rising. Focus is now back on 1.7815 support, break will bring deeper fall through 1.7535 support.
Regarding trading strategies, we’re holding on to EUR/USD short and will stay short. Next target is 1.2042 but we’ll start to be more cautious below 1.22 handle, which is close to a long term trend line support. We’ve closed out AUD/USD short last week as it recovered ahead of 0.8659 key support level. As it’s close to 0.8544 long term fibonacci level, we’ll stay away from AUD/USD first. Instead, we’ll sell GBP/USD this week. We’re slightly favoring trend reversal in EUR/GBP and if that’s true, GBP/USD could be pushed further lower in a quick pace. To conclude, we’ll stay short in EUR/USD and sell GBP/USD this week.
GBP/USD’s break of 1.6051 support last week confirmed resumption of whole fall from 1.7190. Initial bias remains on the downside this week and current decline would target 61.8% retracement of 1.4813 to 1.7190 at 1.5721 next. On the upside, above 1.6109 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 1.6523 resistance and bring fall resumption.
In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. The firm break of 55 weeks EMA affirmed this bearish case and GBP/USD is now heading back to 1.4813 key support level.
In the longer term picture, we’re sticking on to the view that price actions from 1.3503 are forming the fourth wave of the five wave sequence from 2.1161. That means, firstly, 1.3503 shouldn’t be the end point of the downtrend yet and a new low is expected. However, secondly, as the next fall could be the fifth wave, the breach of 1.3503 could be shallow and brief from long term point of view and we’ll then see a more sustainable rebound.