Dollar demise presents fresh opportunities

After recent downward moves in the US dollar, the foreign exchange market looks primed for an eventful few days.

Although forex markets rarely lack opportunity, the demise of the US dollar over recent weeks, coupled with the already priced-in Janet Yellen Federal Reserve chair announcement, offer some interesting levels to work with. Meanwhile, some of the dollar weakness is now starting to recover.

Moves in GBP/USD have been overstretched, and we saw a correction to the downside following the topping out of the pair around $1.6260. Today’s news from the UK, with manufacturing production missing expectations by a large degree, has seen the pound retreat below the $1.60 level.

On the four-hour chart, a head and shoulders pattern looks to be forming, and so as long as we remain below the $1.60 level, there is a good chance we can make a return to $1.5850 (the bottom of the channel) which coincides nicely with the 200-period moving averages.

EUR/GBP is at another pivotal level, currently testing £0.8470, which is the downtrend from the 1 August highs of £0.8776. A break above this level on a daily basis brings the 200 daily moving average (DMA) at £0.8510/20 into view as an initial target. Failure to do so will see the pair shuffle back towards £0.84.

While below the 200 DMA, bias does remain on the downside for the single currency. A full move through £0.8350 brings £0.8280 as the initial short target.

EUR/USD has failed to reach the top of the bullish channel which has been in situ since July 2012, from its $1.2070 lows. We have seen two fairly bearish daily candles recently; on 4 October and now today, which ultimately sees the $1.36 zone as a level too far.

The RSI bearish divergence offered a clue that we would see a little downside. Expect the $1.35 level to hold at least for a while, as the bottom of the recent range is $1.3460. The one-hour chart has a semblance of a head and shoulders reversal pattern, with the neckline at $1.3550 (200-hour MA) already breached, and any returns to test this level could be used as a shorting opportunity. The initial target is the $1.3410 level.

USD/JPY is below the 200-day moving average and the uptrend line from the lows of last November do seem to put the bias in favour of additional yen strength. If we see further declines below the ¥96.60 level, a return to the previous support at ¥94.00 seems the most probable scenario. The cross of the downtrend from the highs at ¥103.70, and the long-term uptrend suggest that only a move through ¥99.70 will reverse the overall move in progress.

US Dollar Basket (Dec 13) chart

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