Technical FX Trends to Watch Now

11/22/2011 6:00 am EST

Focus: FOREX

News headlines continue to drive world currency markets as major pairs including EUR/USD, GBP/USD, USD/JPY, and others trade close to important support and resistance levels.

Comments by European Central Bank (ECB) President Mario Draghi highlight the ECB’s position in the European debt crisis. His remarks suggest the European Central Bank will not come to the rescue of financially pressured nations. However, a creative solution between the ECB and the International Monetary Fund (IMF) may allow the ECB to avoid the restrictions placed upon the central bank by EU treaties.

CAD: Canadian Inflation Overshoots Forecasts

Canadian inflation for the month of October came in higher than expected with core CPI climbing 0.3% month-over-month (m/m) on consensus forecasts of 0.2%. Headline CPI was also higher at 0.2% m/m on expectations of only 0.1%.

The year-over-year data requires a second look, as it shows core inflation actually fell to 2.1% vs. 2.2%.

Despite the drop in the annual inflation rate, the monthly inflation data will likely prevent the Bank of Canada (BoC) from lowering interest rates in the near term out of fear of losing its grip on inflation. The BoC would like to ease interest rates to support the Canadian economy given the expected economic slowdown in Europe.

The CAD was bid after the inflation numbers, which could keep the CAD supported in the short term. Support for the USD/CAD is found at the rising support line from the early-November lows, which come in at 1.0100. Resistance is last week’s high of 1.0300, followed by the October high of 1.0650.

EUR: ECB Sticks to Its Guns

Comments on Friday from ECB President Mario Draghi suggest the ECB will take a hard-line stance and not come to the rescue of Italy, Greece, and Spain, as France would prefer. Draghi’s stated position essentially eliminates the ECB as the “lender of last resort,” a solution where the ECB would buy unlimited amounts of European bonds to allow financially pressured nations continued access to capital markets.

The bond purchases would most likely be funded by turning on the ECB printing press. Germany worries this would have the effect of hyperinflation and a loss of the hard-earned credibility of the ECB.

The EUR came off of its daily lows on Friday after Dow Jones reported a proposal being studied that could allow the ECB to lend to the IMF, which would turn around and lend to sovereign nations. The creative solution would allow the ECB to avoid breaking EU treaties that prohibit the central bank from financing a nation’s deficit.

In other words, the ECB printing press would be still be used. A solution which allows the ECB to finance additional bond purchases would be a EUR catalyst.

There is a bullish wedge pattern that has formed on the EUR/USD daily chart. The falling resistance line is off of the October high and the support line falls off the November 1 low. Resistance is found at 1.3615. A break here and the EUR/USD could test the November highs near 1.3850.

NEXT: USD/JPY on One-Way Street; Oil Tests $100

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JPY: USD/JPY Is a One-Way Street

The USD/JPY continues to move lower following a bout of USD weakness. With the USD/JPY breaking below the 76.80 support level, there is little support remaining on the charts to stand in the way of the pair’s all-time low.

Since the Japanese intervened in the FX markets on October 31, the USD/JPY has been moving in one direction only. The pair has retraced more than 61% of the gains following the government intervention. Expectations are for the USD/JPY to continue to decline towards its all-time low at 79.55.

Resistance will be found back at 76.80, followed by the long-term downtrend from 2007, which comes in today at 79.15.

Crude Oil Briefly Rises Above $100

Spot crude oil prices briefly peaked above the psychological $100 level before being sent lower on a stronger US dollar and doubts of a continued economic recovery. While the pullback in the price of spot crude oil may seem worrying, especially given the bearish technical signal from Thursday’s trading, a healthy trend requires the occasional decline.

Our expectations for an additional round of bond buying from the Fed (QE3) could very well support crude prices in the future. Despite last Thursday’s bearish outside day down candlestick for spot crude oil, a pullback may be natural considering the commodity has added more than 33% to its price since the beginning of October.

Declines in the price may allow traders additional buying opportunities in the commodity. Support for spot crude oil is found at $96.65 from Friday’s low, followed by $94.50 from the October 25 high. Resistance comes in at last week’s high of $103.25, followed by $104.50 from the mid-May high.

Technical News for Major Currency Pairs

EUR/USD

A bullish wedge pattern has formed on the EUR/USD daily chart.

chart
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The falling resistance line is off of the October high and the support line falls off the November 1 low. Resistance is found at 1.3615. A break here and the EUR/USD could test the November highs near 1.3850.

Should the pair continue its trend lower, it could encounter support at the rising trend line from the January 2010 and October 2011 lows at 1.3270. Traders may be eyeing the October low of 1.3145, followed by a deeper move to the 2011 low of 1.2875.

NEXT: Latest for GBP/USD, USD/JPY, and USD/CHF

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GBP/USD

After breaking lower from the late-October/mid-November consolidation pattern, the GBP/USD rose back to the previous support line at 1.5850, only to turn lower once again.

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This is a textbook retracement to a previously known support that has now turned into resistance. Support may be found at the October 18 low of 1.5630 followed by the October low of 1.5270. Resistance comes in at the top of the previous consolidation pattern at 1.6075.

USD/JPY

The slow decline of the USD/JPY back to its all-time low at 79.60 continues while the charts show very little support to prevent the move.

chart
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Any attempt to bid the pair higher may encounter selling pressure at the November 15 high of 77.50, followed by the long-term downtrend from the June 2007 high, which comes in at 79.10.

USD/CHF

The rally from the late-October low continues to gain steam as the pair approaches the October high of 0.9310.

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Both weekly and monthly stochastics continue to move higher. A break of 0.9310 will expose the 20-month moving average at 0.9450 followed by the February high of 0.9770. Support is off of the November 3 low of 0.8760, which coincides with the 100-day moving average.

While perhaps a bit extreme, the pair may eventually target the falling trend line off of the 2003, 2008, and 2010 highs, which comes in at 1.1200.

By the Staff at Forex Yard

Find more forex analysis at ForexYard.com.

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