Four out of five days the price for the Fiber advanced last week, for a total of 250 pips, printing a higher high in a string of consecutive higher highs and higher lows since it came off its low over a month ago. Ever since the FED went data dependent, there is a lot of volatility in this pair around the release of US data items. The bearish sentiment on the dollar of the last couple of weeks continued last week and we saw high impact data points miss their expectation like retail sales on Wednesday, ppi on Thursday and the preliminary UoM consumer sentiment on Friday. These misses caused the pair to rally (they don’t call it the anti-dollar index for nothing!) and it will be interesting to see what the rest of May brings in terms of US data.
The dollar is poised for more bearish sentiment the coming week and the price for the Fiber could advance again if US economic data continues to come in below expectations. In their last statement, the FED explained the bad data from the first quarter by pointing to transitory factors such as weather conditions. If however this continues throughout May (especially for inflation and employment numbers), they would have to acknowledge its more than transitory. Should the FED change their tone, we will see heavy selling of the Greenback. I still see it as the strongest currency fundamentally, but its current direction depends on the data being released. Signs that the Eurozone economy is recovering could strengthen the euro in spite of the ECB QE programme and its biggest risk remains the Greek debt situation.
On the technical side, price is trading inside the potential reversal zone (PRZ) of a bearish Bat pattern on the daily. It seemed to have reversed already two weeks ago (and some may have jumped the gun on this), but the zone had not been properly tested so price came back for a real test last week. It’s also testing the upper trend line of a bullish parallel channel, which intersects this reversal zone. We have an area of resistance just above the PRZ, charted as Resistance Zone I, with the top level at 1.153. Even if PA would exceed the reversal zone, penetrate this resistance zone and reverse here, the Bat pattern would still be valid as it’s only invalidated when price pops above the X point residing at 1.153.
There is clear regular bearish RSI divergence developing, indicating underlying weakness and possible trend direction change from uptrend to downtrend. And finally there is a long-term bearish trend line cutting through the resistance zone, which could also provide a reason for reversal. In total there are five technical reasons why the Fiber is looking to reverse soon. Those looking to trade this potential reversal should put their stop loss above 1.153, as illustrated in the chart. I would look for a first profit target at the 382 retracement of the AD leg and the second target at the 618 retracement of the AD leg, giving a reward - risk of 4.2.
Should however price break Resistance Zone I, we could be in for a strong rally. This would present an opportunity to go long with stops below Resistance Zone I and I would be looking for a final target at 1.200 (with the first target being equal to the trade risk). I did not plot the stops and profit targets for this long trade, as the chart would become cluttered but the trade would give a reward - risk of 3.8. We would have a Crab pattern completing at 1.205, with the PRZ just above it. 30 pips above this zone is the 50% retracement of the decline that started May of last year and above that level we find Resistance Zone II with the top level at 1.236. This would present an opportunity to short the Fiber, with stops above Resistance Zone II, the first profit target just above Resistance Zone I and the second at the 618 retracement of the Crabs AD leg, giving a reward – risk of 2.9.
UPDATE: Price keeps dropping due to the regained dollar strength after the strong core cpi numbers last Friday as well as the latest uncertainties surrounding Greece. TP2 is in sight.
timwest
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Great summary analysis of the market and key factors driving it. Really nice!
JazzForex
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Thanks Tim, I appreciate it.
qFish
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Such a beautiful chart!
JazzForex
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Thank you for saying so.
SergiyKurbatov
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Insight on EUR strength: It is all about European bonds at the moment. The fall of German bund prices and rise in bund yields has been matched by a rise in the euro - investors have been dumping bonds owing to pathetic yields. If this continues the euro could stay stronger for longer.
Looking at the longer-term picture we continue to see a broad consensus amongst analysts that at some stage the decline in the EURUSD will recommence. While not all are predicting parity in the exchange rate even the most optimistic forecasts are pricing in 1.04 once again. Barclays are more bearish though. “While we acknowledge upside risks, we continue to forecast EURUSD to reach 0.98 at the end of December 2015 and 0.95 at the end of March 2016 as the US recovery regains momentum,”
Nice longer term view ... I've given my view on the shorter term here
JazzForex
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Thanks for sharing your chart! We both have a decision point at the same level (1.153) above which there is a clear opportunity to go long. Until then the Bat remains technically valid, agreed.
Nico.Muselle
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Good to see we're on the same page here ... and I fuly agree that fundamentals, mainly US data will determine the price action for the time being ... so whether the bat remains valid of will be invalidated will not so much depend on EUR strenght. The issues around Greece are mostly factored in imho, otherwise we would not see the pair going up. Only a surprise action on that subject could influence price.