US Dollar Retracement to Offer Buying Opportunity (Fibonacci Weekly)

Last week, most of the forex majors overcame significant resistance against the US dollar but a notable correction failed to materialize. Looking ahead, positioning suggests current ranges will give way to a retracement of the greenback's strength, offering entry opportunities to traders betting on further Dollar appreciation.

EUR/USD

Strategy: Pending Short.

Euro positioning is little-changed from last week: price action had set up in a Falling Wedge reversal formation and has apparently broken above resistance. The breakout failed to spark bullish momentum, with the pair trading sideways along resistance-turned-support at the wedge top. Continued positive divergence with the RSI oscillator points to the likelihood for a corrective upward swing before bearish momentum resumes. Initial resistance is seen at 1.2932, the 23.6% Fibonacci retracement of the 09/22-10/27 decline and current range top. On balance, our strategy going forward remains unchanged: we will look for an upswing to establish resistance below the downward sloping trend line stretching from the pair's peak in July. From here, we will enter short to trade with the dominant long-term bearish trend.

GBP/USD

Strategy: Pending Short.

Broadly speaking, the setup for the British Pound is unchanged from last week: GBPUSD is trading in a Falling Wedge bullish reversal formation akin to that of the Euro. Price action now stands at support showing a Hammer candlestick while positive divergence with the RSI oscillator points to the likelihood of an upward push. The line in the sand is found at 1.5531, the intersection of the wedge top and the 23.6% Fibonacci retracement of the 09/25-11/13 decline. As with the Euro, we will look for GBPUSD to exhaust its correction on a test of the downward-sloping trend line established from July to get short for a continuation of the long-term bearish trend.

USD/JPY

Strategy: Flat.

Yen positioning has remained choppy with the currency's tendency to mimic market risk sentiment leading to knee-jerk price action in recent weeks. Current positioning sees USDJPY positioned above support at 96.90, the 38.2% Fibonacci retracement of the 10/24-11/04 upswing. On balance, the longer-term outlook looks to favor the bears with price action below trend line resistance I place since August, but current positioning does not offer lucrative risk-reward parameters to actually enter short. The upcoming G-20 summit also offers significant event risk, making us wary of taking exposure in a pair so closely tied to trends in risk appetite. We will remain flat for the time being, allowing USDJPY to move into a better position before committing to a directional bias.

USD/CHF

Strategy: Pending Long.

As we noted last week, the setup in the Swiss Franc pairing is a near-perfect inverse of EURUSD: we see a Rising Wedge confirmed with unmistakable negative divergence with the RSI oscillator. Price action is showing back-to-back doji candles at resistance, adding to the case for a downward correction. Near-term support has been established at 1.1688, the 23.6% Fibonacci retracement of the 09/22-11/13 rally. Initially, we will look for a break of major support at the intersection of the wedge bottom and the 38.2% level (1.1501). From here, we will look for signs of exhausting bearish momentum to establish long for a continuation of the dollar's long-term uptrend.

USD/CAD

Strategy: Pending Long.

Having rallied smartly to test the 1.30 level, USDCAD showed a Dark Cloud Cover candlestick formation and collapsed to break through upward-sloping trend line support in place since late September. Support has been found at 1.1519, the 38.2% Fibonacci retracement of the 11/07/07-10/28/08 ascent. Last week, we noted that USDCAD had put in a Harami candlestick formation, suggesting the downturn may be nearing completion. Indeed, the pair rallied an impressive 8.1% to pause ahead of resistance at 1.2454, the 14.6% Fib level. While this initially seems like a good place to get long, the compelling evidence for a period of US dollar weakness across the other majors has us thinking that perhaps patience is in order. As such, we will remain on the sidelines for the time being, looking for USDCAD to slip back below current support at the 23.6% mark (1.2093).

AUD/USD

Strategy: Pending short.

Our current assessment of Australian dollar positioning is somewhat different from what we saw last week. Prices seem to be setting up an inverted Head and Shoulders bullish reversal formation, with neckline resistance in close proximity of the 38.2% Fibonacci retracement of the 09/22-10/27 selloff at 0.6957. Current positioning is showing a Bullish Engulfing pattern, hinting at the possibility of an upside reversal. We will look for a bullish correction to take prices past the neckline to position for a short in line with the long term AUDUSD downtrend.

NZD/USD

Strategy: Pending Short.

New Zealand Dollar positioning closely mirrors that of EURUSD: price action broke above initial resistance at a downward-sloping trend line established in late September but has since failed to gain momentum, easing lower to trace resistance-turned-support. As with a lot of the majors, positive divergence with the RSI oscillator points to the likelihood of a bullish correction before the downtrend resumes. Initial resistance is seen at 0.5909, the 23.6% Fibonacci retracement of the 07/16-10/27 decline.

DailyFX

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