Forex Market To See Near-Term US Dollar Weakness (Candlestick Weekly)

The US Dollar has come under heavy selling pressure and looks likely to see further near-term losses as risk appetite rushes back into forex markets. However, we see this weak spell as corrective and offering welcome entry opportunities ahead of the return to long-term Dollar strength.

EUR/USD

Euro to correct higher before down trend resumes

We sold EURUSD at 1.5510 having identified a Long Black Candle that closed beyond trend line support. The pair is now trading at 1.3660 bringing our floating profit to around 1850 pips. This week opened with the US dollar under heavy selling pressure following the announcement of the G7 credit markets rescue plan. However, we still view the long-term trend favoring the greenback as priced-in interest rate expectations call for it to gain at least 50 basis points on the Euro over the next 12 months. We will look for markets to correct higher and find resistance at a downward-sloping trend line established in mid-July. We will add to our short position at that point, looking for a return to bearish momentum to challenge the preceding low at 1.3256.

EUR/USD Strategy

1. Continue holding short EURUSD at 1.5510, looking to add.
2. Retain stop loss at 1.5142.
3. Next 'soft target' aims for a test below 1.3256.

GBP/USD

Pound to rise as Dollar retraces recent strength

As wit the Euro, we see the British Pound has apparently found a near-term bottom, showing a Hammer with next-day bullish candle confirmation having tested the lower boundary of a downward-sloping channel that has guided price action in recent months. Also like the Euro, we maintain that the long-run trend favors the greenback as priced-in yield expectations see it gain at least 75 basis points on the sterling in the next 12 months. We expect the current correction in US Dollar strength to see the pair move higher for another test of the channel's top and look for opportunities to sell, targeting a test of the most recent low at 1.6771.

USD/JPY

Yen sells off as risk aversion eases

Sweeping panic across markets had seen traders liquidate carry trades funded with low-yielding currencies in recent weeks, making the Japanese Yen exchange rate a direct reflection of traders' risk sentiment. It is no wonder then that the Yen suffered momentous loses as confidence returned after the weekend's G7 summit. Continued bullish momentum now sees significant hurdles close ahead, with a major multiple support/resistance level near 102.97 closely followed by triple bottom support-turned-resistance near 104.10. These are further reinforced by a downward-sloping trend line that has marked price action since mid-August. The fundamental bias does not seem to offer a clear-cut view on relative strength of USDJPY, so we will remain on the sidelines for the time being as more evidence presents itself.

USDCAD

Canadian Dollar to move higher near-term

Last week, USDCAD rallied sharply higher to break above resistance at a downward-sloping trend line established in May 2005. The pair would reach as high as 1.2120, but has started to pull back sharply this week on broad US dollar weakness linked to the G7 rescue plan to shore up credit markets. We expect the current correction to re-test trend line resistance-turned-support near 1.1022 before the bullish trend resumes.

AUDUSD

Australian Dollar to rise with risk appetite

Australian dollar positioning is nearly identical vis-à-vis its US counterpart to that of the Euro. High-yielding 'carry' currencies have rebounded strongly to start the week as risk appetite returned to financial markets. Interest rate expectations point to the yield gap tightening by at least 50 basis points in favor of the greenback over the next 12 months, suggesting the bearish bias remains in effect. We see the current correction testing resistance at the downward-sloping trend line connecting the highs since mid-July before offering a new selling opportunity to challenge 0.65 again

NZD/USD

New Zealand dollar to fall in with risk rebound

As with the Australian Dollar, NZDUSD saw bullish momentum when high-yielding 'carry' currencies rebounded strongly to start the week as risk appetite returned to financial markets. Current positioning seems a bit cleaner here, however, with the previous support in the 0.6435-0.6550 region falling close to where bullish momentum could feasibly meet the downward sloping trend line established from an Evening Star reversal pattern in mid-July. The dollar is expected to see the yield gap shrink by a whopping 175 basis points in its favor, suggesting the down trend will remain in effect for some time to come.

DailyFX

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