The currency strength indicator on the daily timeframe has been signalling the UK pound as strongly overbought (yellow line) and the Japanese yen (magenta line) as oversold for some time, and today has finally seen the pair move lower following last week’s extended congestion phase in the 151 area of the chart.
This period of price action was preceded with the two bar reversal, sending an intial signal of weakness following the overreaction to hawkish comments from the BOE, with wide spread price action in the up move, not supported or validated with volume. |For any such move, volumes should have been dramatically higher, a clear sign of the lack of participation by the insiders, and signal of a trap being set. The trap has now been sprung and helped lower with weak UK economic data as the new month begins.
As we can see from the currency strength indicator on the left we have some way to go, and moving to the price chart, there is little meaningful support until we reach the volume point of control at 146, and with low volume nodes in the 148/149 area, the price action should move through here with some momentum.
By Anna Coulling
A classic VPA on 5 min chart of GBP/JPY on the release of NFP today. Huge down candle on light volume, before we saw a switch back higher as market absorbed poor numbers, and likelihood of a September FED hike in interest rates disappear faster than snow in July.
The trigger of the volatility indicator (purple arrows) also signaled high probability of a re-trace to within spread of the down candle. Volume simply validated this point.
Indeed FED Funds Rate now pricing in a 44% probability of a rise in rates in December which is a re-run of last year’s interest rate saga. As of yesterday FED funds showing a 30% probability of a rise in September
From a technical perspective last week was not an easy one for the euro with a divergence of sentiment across the complex. Against the USD it found some much needed support at the 1.0825 support level, which provided the springboard for a move up and through the VPOC on the daily chart at the key 1.09 price point. The pair managed to maintain this bullish momentum through to the end of week before finally ending the week at 1.1004 on reasonable volume. However, this move higher has, so farfailed to follow through in today’s trading session with the 100 ema providing the cap. Bearish sentiment towards the euro has also increased in the futures market where shorts have added 18.1k contracts taking the total gross short position to 172.5k, the largest increase since November 2015.
This week we also have the ECB interest rate decision and obligatory press conference, and given the current economic downturn in the eurozone, the market is expecting Draghi to increase the current bond/asset buying program, or even an announcement of some new and innovative measures.
With eurodollar somewhat constrained, euro brears may wish to consider the eur/aud where bearish momentum has continued, and provided the pair take out the key support at the 1.4735 region, then expect a quick momentum run to 1.4644.
Finally for a view of market sentiment on the longer term timeframes, our currency strength indicator may provide us with some clues. And here while we have the euro oversold on the daily chart, and the likelihood of a possible move higher, this has to be placed against the context of the weekly chart where sentiment is still heavily bearish, in parrticular against the Aussie.
Some solid gains for gold last week as the precious metal ended last week in a bullish mood following an extended period of price consolidation within the spread of the volatility candle triggered back in early February. Cannot stress the importance of this candle, moving as it did way beyond the average true range for the metal in this time frame, it has since defined and described any further move higher.
Friday’s price action too is important for the longer term with substantial volume coming into gold, helping to push the metal to test the $1279 per ounce region, before falling back on profit taking ahead of the weekend.
Gold has started the new trading week in a very positive move with the 200 ema on the weekly chart providing the necessary support as the precious metal attempts once again to take out the $1279 per ounce high. A move through here on strong and rising volume will see gold move to regain the key $1300 per ounce price point where we also have the volume point of control on the weekly chart.
A worse than expected UK manufacturing production figure of -0.4% against a forecast of 0.1% (-0.4% was the figure in December) has given sterling bears a further excuse to sell the currency, with some really nice downtrends in a number of GBP pairs. In addition industrial production also followed a similar trend coming at -0.7% against a forecast of 0%, and declining further against last month’s number of 0.1%,
The data injected volatility into the sterling pairs, with volatility candles triggering in the faster time frames. Cable managed to find some minor support at 1.4458, before moving lower, and what is significant is that the hourly CSI is showing GBP as likely to be moving steadily lower, and we will have to wait for the US session to see if there is any halt to the current bearish momentum.
Following last week’s turbulent price action, no surprise that today the markets have been a litte muted with the added bonus the Shanghai Composite only fell 5% in overnight trading. And with Japan closed for it’s annual Coming of Age Holiday even the Nikkei could take a day off!
Meantime last Friday the euro was the currency to watch as it ended the trading week on a burst higher against most of its counterparts, and posting very positive candles on the daily charts. However, despite an early follow through today’s trading session for the euro has been marked by some great trades to the short side, in particular against the USD, the Aussie, GBP, NZD & CAD.
The euro daily matrix illustrates this perfectly with the eur/usd, eur/gbp/ & eur/aud all exhibiting similar price action. The exception had been the eur/nzd, but here too the euro appears to be moving back to test the VPOC (volume point of control) at 1.6420.
Against the CAD it is the continuing fall in oil prices which will continue to be the major factor in this pair with the resistance at 1.5553 now key, a level from which the pair pulled back in March 2014 and again in August 2015.
Good to see the Kiwi on a bit of tear (the white line on the currency strength indicator), but comes as no surprise given how oversold it was at the end of last week. We’ve been tracking the NZD/USD which has had a huge move higher overnight & broken through the VPOC on the daily chart and is now touching the 100 ma.
As we mentioned in yesterday’s webinar although December price action can often seem erratic, it can nonetheless offer some great trading opportunities. And those of you who come along regularly to our webinars will know David & I are great fans of both the Kiwi and Aussie! You can register for the trading webinars here.
The hourly currency strength indicator is showing some great potential set ups. Have a great trading day.
Thanks to everyone for coming along to our forex webinar for the London session earlier, where our focus was the euro & eurodollar, particularly with some pretty heavy option expiry strike prices due up later today. Also in view was the kiwi which was in a similar state to the British pound ahead of Chancellor Osborne’s autumn statement. In other words totally beaten down across multiple time frames, and despite various efforts to rise kept falling back into oversold territory. Interesting to see the Kiwi (white line) has now moved off the floor on the 30 & 60 min CSI.
Also note the USD (the red line) is very overbought, so we need to keep an eye on what it is likely to do the remainder of the day. What happens in our next webinar for the US session is difficult to tell given it was Thanksgiving yesterday, and today is Black Friday. Appreciate it’s not a national holiday, but given many in the US are taking an extended holiday, and we have end of month, not sure what type of price action we are likely to have. Despite this one thing is certain David & I will always have something to say about the markets. Hope you can come along.
This morning’s highlight comes from Chancellor George Osborne here in the UK with his Autumn Forecast Statement, so expect lots of smoke & mirrors, volatility and opportunity to shake traders out of the market.For the British pound complex on the faster time frames, it’s been a case of some good moves lower against USD, JPY & euro. The hourly currency strength indicator is also highlighting the GBP as heavily oversold, but as we have said many times in our forex webinars – currencies, markets and instrument can stay stubbornly over extended much longer than we think. And as we also say in the webinars your time horizon will always be a factor in any trading decision, and also help to quantify the level of risk associated with that trade.
Discover more about the currency strength indicator here.