Euro Expected to Form a Low Soon; British Pound Breakout Trade

Tue, 06 Jan 2009 08:21:09 -0500

By Jamie Saettele, Senior Currency Strategist

-euro / dollar support at 1.33 and 1.3185-1.3220
-British Pound congestion will lead to a breakout
-Australian and New Zealand Dollars to test resistance



I wrote yesterday that “the decline from the July 2008 high (1.6040) can be counted as a 5 wave drop (wave 5 is truncated).  5 waves down at this degree of trend indicate that the long term trend has changed and that a multi-year bear is underway.”  The surge through 1.47 fits as a larger second wave (second waves tend to be sharp and retrace a significant amount of first waves).”  This count is my alternate and I will concentrate on my preferred today.  Although the drop from 1.6040 can be counted as a 5, the count fits better as a 3 in my opinion.  The sharp drop from 1.6040 needs time to be corrected, so a triangle or flat is probably underway from 1.2327.  With this in mind, the next opportunity will come from the long side.  There is potential support at 1.33 (former resistance) as well as 1.3085-1.3120 (also former resistance).  


Staying below 100.60 keeps the long term bear trend intact.  There is potential resistance in the 95.20/70 zone; this is the 61.8% of the decline from 100.60 and the March 2008 low.  Daily RSI has entered overbought territory, which can last for days.  Still, an opportunity may come from the short side in the next several days.


The British Pound is testing multi-year lows.  The count above suggests that the GBPUSD will soon enter a 4th wave that should consume at least a few months.  Divergence with RSI on the daily chart also warns of a pending rally.  A significant congestion zone has formed, and a strong directional move is expected soon.  Again, the weight of evidence suggests that the move will be higher.


To review the bigger picture…a 5 wave advance from .9634 is viewed as the first bull leg in a multi-year uptrend.  The sharp drop from 1.23 is the bulk of the correction (wave A) in terms of price but not time.  The rally from .9634 took 9 months and the corrective decline has entered the beginning of its 3rd month.  The USDCHF may enter into a sloppy range in this B wave before testing potential resistance from Fibonacci near 1.13 and 1.15.  The next opportunity will come from the short side but probably not for a number of weeks.


It is still possible that the USDCAD drops below 1.1459 in order to complete a larger 4th wave.  It is also possible that a smaller second wave is complete or nearly so at 1.1812.  Staying above 1.1459 keeps a very bullish count on track in which the USDCAD accelerates higher in wave iii of 5. 


The AUDUSD has satisfied minimum bullish expectations having exceeded .7022.  The 3 wave rally from .60 may be just the first of a string of 3 wave moves that will form wave (2) within the long term decline that began at .9856.  A choppy range may form as an X wave drifts lower from here.  However, staying above .6753 keeps alive the possibility that the AUDUSD rally accelerates towards Fibonacci resistance, which begins at .7256.


Expectations are for a rally through .6090 while the NZDUSD remains above .5655.Fibonacci at .6183 combined with congestion in that area is likely resistance. 



Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week.  He is also the author of Sentiment in the Forex Market.


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