FX Technical Strategy Weekly
Pounds to Ounces
Market Overview
As volatility remains exceptionally high, the current strategy continues to be cautious and flexible. From a trend perspective, it is suspicious that the euro dollar has failed to extend below 1.2332 given the external opportunities for this to occur (weaker equities, persistently soft commodities). However, the bias for the moment favours this scenario for a test of 1.2135.
This could be an important week for this trend. Failure to break lower will encourage some reduction in dollar longs and revert the risk once again for a counter trend retracement. This will happen in a major way at some point, but for the moment, the broader strategy favours the dollar and yen.
The key mover last week was sterling. The break of 1.5270 was a very important signal and hence remains a pivotal level for a sterling recovery. Whilst sterling has rebounded from an oversold position in recent days, a return to 1.45 and 0.8600 is expected against the dollar and euro.
Gold priced in sterling terms remains in an upward trend and looks set to break higher. Key resistance is at £500, but this looks set to break over the coming weeks. Only a drop through £445 would signal a major top.
Euro/US dollar
The short term price action is taking on the form of a descending triangle. The main trigger here is for a decline through 1.2332 with the next key barrier at 1.2135 (50% retracement from 200 low to 2008 high). A break lower should occur this week, failure would revert the risk back upwards. Main stops are on a close through 1.2850.
US Dollar/Japanese yen
Short term the market is balanced, but the long term bias favours the yen. Whilst another week of consolidating price action is possible, targets are at 90.00 and then 80 into Q1 2009. Short term stops are over 97.60 with longer term stops through 101.30.
Sterling/ US dollar
1.5270 is a key support turned resistance and is the line in the sand for sterling bears. Giving the downward prospects for sterling yen (see later chart) further downward pressure towards 1.4500 is expected. Sell rebounds to 1.5100 on stops over 1.5310.
Euro/Japanese yen
After a period of consolidation, a test of key lows is expected here with triggers at 120.00, 117.67 and the key low at 113.64. Sell a rebound to 123.00 with stops on a two day close over 124.50.
Australian dollar/US dollar
A potential reversal pattern, which would have been be positive for the Australian dollar, looks set to fail as 0.6336 support comes under pressure. A break of this level should occur this week with an extension through 0.6000 the conclusion. Whilst the long term outlook is positive for the Australian dollar, for the moment the pressure is on the downside. Any break of 0.6708 would suggest a strategic review.
Euro/Sterling
Having punctured the upside of the range, the market has been thrown into a renewed upward trend. Whilst from a long term perspective we could be approaching the end of this run, in the short term a combination of high volatility and investor investor sentiment will weigh on sterling. Interim support is at 0.8360, but do not discount a re-test of 0.8300 prior to a move towards 0.8600 once again. Only a two-day close below 0,8300 would suggest a change in sentiment.
New Zealand dollar /US dollar
The rally here is starting to unwind with the market approaching key lows at 50.00. Whilst the long term trend is expected to favour the New Zealand dollar, for the moment, the trend points to a decline towards 0.4500 over the coming weeks. Stops are on a two day close over 0.5780.
Sterling / Japanese yen
The move to 139.05 was dramatic and this is normally associated with the final part of a trend. However, the recent price action is taking on the form of a descending triangle. This implies resistance up towards 157.50 should cap gains before the downward trend resumes. Unfortunately volatility is high although from a short term perspective the market should struggle to get past 147.00, making a better risk reward proposition. Naturally a move through the 139.05 low would be the confirmation the trend is resuming.
Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com
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