Traders arrived at their desks this morning to find that the risk of a debt default by the US has been averted at the 11th hour. Hardly a great surprise since there was no way that such a scenario would have been allowed and as a result, risk tolerance has returned with gold and Treasuries falling and equities rising, along with the euro.
So how is the forex market reacting to this news and, as always, let’s begin our analysis with the dollar index. From a technical perspective the key day in July for the index came on the 12th when we saw an attempted breakout fail at the 76 level with the day’s price action closing as a long leg doji, clearly indicating a degree of weakness and a potential reversal which was duly confirmed over the next few days. This weakness resulted in the index falling back to test the lows of early June in the 73.48 area. This bearish sentiment has continued with a minor rally last week which ran into resistance from both the 9 and 14 day moving averages and this morning’s price action is, once again, to the downside and below all of our short term moving averages.
The key level for the index is now the platform of support created in early May in the 72.69 price zone and should this be breached then we will have a significant triple top in place on the daily chart in the 76.50 region, suggesting further short term weakness in due course. The longer term averages are also adding further pressure to the downside and indeed the 200 day average provided the resistance to the 12th July rally.
This reversal in the index has impacted the usual pairs, not least the euro vs dollar, which is once again pushing higher to re-test the 1.45 area and any break and hold above this region should see the pair extend this gain to re-test the 1.4688 price zone of early June. The rally for the eurodollar was triggered following the deep hammer candle of the 12th July which mirrored the weakness in the dollar index and, this upwards momentum for the eurodollar, is set to continue for the short term with this morning’s price action breaking above all of our short term moving averages once more. Indeed the 9 day moving average has now crossed above both the 40 and 100 to give us a bull cross signal, with the 200 adding further support below. Should we subsequently see a move above the 1.47 area then we may even see the euro climb to re-test the interim high of 1.4939 of early May.
Cable has also benefited from recent dollar weakness and now looks set to test the 1.65 area where minor resistance awaits and should this be breached then we could possibly see a test of the 1.67 high of late April. Once again, the short term signals here are bullish with both the 9 and 14 day moving averages crossing above the 100 day to give another positive signal. It is also interesting to note that in last week’s price action the 100 day average provided a solid platform of support to any downside probing, suggesting that positive sentiment for this pair is in the ascendency at the moment.
The dollar swiss continues its remorseless and relentless trend lower reflecting the market’s desperate search for a safe haven as traders and investors continued to pour into the Swiss Franc. Having breached the psychological 0.80 level last week we are now looking set for a further move lower this week with both the 9 and 14 day moving averages preventing any rally from gaining momentum and with the 40, 100 and 200 simply reinforcing this sentiment.
It is interesting to note that despite today’s more positive market mood the eur chf has not entirely reflected this sentiment with the pair initially rallying before falling back once again, so perhaps today’s relief may be short lived.
The usd jpy, as outlined in one of my posts last month, has continued to head south and is now approaching a key level on the daily chart at the 76.67 price level, at the point at which the G7 countries combined to intervene following the earthquake in Japan. If you are trading this pair then just be aware that there are many influences, not least the Bank of Japan, the appetite risk for the carry trade, and appetite risk in general for equities, all of which are reflected in this complex relationship.