FX snapshot – US Dollar Index, EUR/USD, GBP/USD, EUR/GBP

Hesitation is rife in FX markets ahead of key fundamental releases, yet with a possible head and shoulders formation in both the US Dollar Index and GBP/USD, there is the possibility of some trend reversals.

A sterling and US dollar note side by side
Source: Bloomberg

US Dollar Index forming potential head and shoulders

Yesterday saw the Dollar Index fail to break back above last week’s $98.00 peak, with the price instead topping off around $97.50. With the price having seen substantial gains and reaching a key long-term trendline resistance, the fact that we are now seeing this kind of failure to regain the price back above this trendline is a bit of a warning.

Given the lower high, we have a potential right shoulder in a possible head and shoulders pattern. Thus there is a possibility that this could be a top, where the neckline is around $96.74. This also represents the approximate September resistance. As a result, I am less bullish given the failure rally yesterday and instead either await a close below $96.74 for bearish connotations (support at $96.52 and $96.15) or else a bullish reversal sign between $96.89 and $96.74 (subsequent resistance at $97.40).

EUR/USD triangle should provide direction

The EUR/USD pair is currently trading within a relatively short-term triangle formation, which is very close to completion. Coming off the back of a two-day rally, it could be a possible bullish continuation pattern. However, I see it more as a bearish reversal pattern with the recent rally forming a retracement.

The fact that the rally did not retake the $1.11 level is key here, and I believe we are more likely to break lower for another selloff than break higher. However, the beauty of this kind of pattern is that you can await the signals of a breakout rather than simply guessing. Thus a close back below $1.1005 would point towards a resumption of the bearish trend (back towards $1.0897) whereas a close back above $1.1053 would point towards a possible bullish bounce towards $1.1072 and $1.11 in the near term.

The stochastic is seeking to roll over in a bearish move, which given the price is at the bottom of the triangle, could point towards the bearish breakout I expect. Bear in mind that should this occur, it would likely cause the dollar basket to bounce higher.

Possible head and shoulders in GBP/USD

With the price having hit some key resistance levels on the recent move higher, we are seeing some clear signs of weakness as the price sells off this morning.

The failure to retake $1.55 points towards a possible right shoulder being formed, which would need a break below the descending trendline to fully complete. Should we fail to move below that level, then we are simply looking at a broadening formation.

Thus, as we sell off with a bearish engulfing pattern, it seems likely that further losses are likely. However, with the price back at the $1.5405-$1.5415 support zone, I would be hesitant to go short right now. For this reason, I believe the losses to be short-lived and will only be fully bearish with a break back below trendline support (currently $1.5396).

Choppy EUR/GBP downtrend continues

EUR/GBP has been moving lower ever since the European Central Bank meeting almost two weeks ago. The recent move higher has brought the price back to the 50-hour SMA, and in all likeliness I expect us to see this pair selloff once more in the coming days. Trendline resistance is above the current price, providing a cap upon any further bounce, and I would need to see a move back above £0.7168 to see anything other than further selling to come. Thus I am bearish and expect a move below £0.7105 and in the coming days.

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