The EUR/USD rallied on Friday because of another decline in U.S. Home Sales and the inability to break the crude oil market. Both of these factors epitomize what the Fed is facing in the short term: cut rates to stimulate the economy or hike rates to stem the inflation.
While the Fed has to consider these two factors, the ECB is remaining staunch in its stand to continue to fight inflation. Another round of weaker than expected reports from the U.S. next week could force out all of the Euro shorts and retest the all-time high at 1.6019.
EUR/USD could not confirm Thursday's reversal top at 1.5814 with a follow through break. This action sets up a possible retracement rally to 1.5779. A break out above 1.5779 would indicate a further rally to 1.5899. The reversal top will be negated if 1.5814 is taken out.
Look for support at 1.5763 and 1.5523.
USD/JPY Caught in a Tight Range; Impending Volatility is Building
USD/JPY remained in a tight range between 102.56 and 105.43. Traders have been indecisive about the direction of the U.S. economy and have chosen to keep the market in a range until the situation becomes clearer.
Friday's weakness in the stock market may have clarified things for Yen bulls next week as the main trend has turned down in all three indices and further declines are indicated.
Traders are expected to seek the safety of the Yen if the stock market accelerates to the downside. Volatility is building inside of the tight range and is ready to break out.
The USDJPY could not confirm Thursday's reversal bottom at 102.72 with a confirmation rally on Friday. This indicates that much of the rally the previous day was short covering rather than new buying.
Once again, the market found resistance on a downtrend line at 104.11. This line, which is controlling the direction of the market, is currently pointing down.
The trend turns down on break through 102.56. This action could trigger a further decline to 101.98 before profit-takers step in.
Better Retail Sales Help Support GBP/USD
Although the weak housing market, at times, has led to speculation that the Bank of England was going to cut interest rates, the strong retail number this week and soaring energy costs have traders speculating that they may have to raise rates by the end of the year. This news has supported the market, triggered the short covering rally all week, and put the market in a position to challenge important highs for the year.
Technically, this pair traded slightly higher than Thursday before traders came in and sold the market. A seven-day rally often ends with a closing price reversal down. With this pattern developing throughout the day, expectations are for a minimum 50% correction of the first leg up to 1.9606. A follow through break through Friday’s low is needed to confirm the short-term top.
A trade back through 1.9850 will negate this potential top. The subsequent rally could take the market back to 1.9888 with the next potential up side targets the two main tops at 1.9965 and 2.0027.
Uncertainty Makes Swiss Franc Attractive
Traders adverse to risk sold the USD/CHF as U.S. stock markets collapsed due to higher energy prices and fear of an economic slowdown.
This pair is rapidly approaching a major support zone at 1.0130 to 1.0013. There may be some light buying inside of this zone.
Up trading support angles come in at 1.0197 and 1.0125. On the down side, look for down trending resistance at 1.0405 and 1.0461.
Continue to watch the stock market for clues as to the short-term direction of this pair. The weaker the stock market gets, the harder the sell off in the USDCHF.
The Uptrend is on Hold in the USD/CAD until Crude Oil Resumes Trend
Crude oil's tight range could not convince Canadian Dollar buyers from re-committing to the long side after two days of inside action.
Although no damage has been done to the downtrend over the past two days, the consecutive inside days indicates that volatility is building.
Should the crude oil break sharply, the USDCAD could possibly rally back to 1.0030.
A break through .9818 could trigger a sharp break to the cluster of support at .9796 to .9709.
AUD/USD Running Out of Buyers at Current Level; Supportive Correction Due
Talk of another interest rate hike by the Reserve Bank of Australia helped support the rally all week. The consecutive posting of new 24-year highs put this pair in a position to surge to the upside with a move to par expected by the end of the year.
The lack of buyers at the current level is a sign, however, that the market is due for a correction. This forecasted break would not be due to new selling, but a lack of buyers. This move would set up another round of buying.
The main trend is up with the inside day indicating impending volatility. The market is in a position to regain an important uptrend line at .9683 or break through support at .9569.
The first move would indicate strength and could launch another leg up with par as an objective. A break through .9569 sets up a 50% correction to .9471.
Either traders can buy the strength or wait for the dip as the strong up trend is still intact.
NZD/USD Poised to Take out Long Term Resistance
The short-covering rally continued in the NZD/USD, but traders stopped short of breaking out to the upside and turning the main trend to up.
Finance Minister Michael Cullen is attempting to provide stimulus to the economy by cutting taxes and thus avoiding the need to cut interest rates. This action is intended to increase liquidity so that the Reserve Bank of New Zealand would not have to cut rates, which would further weaken the grossly oversold currency.
Technically, the NZD/USD posted a higher high and higher low for the sixth day since the bottom at .7536. The market is now in a position to break out over a downtrend line at .7900.
This trend line has provided resistance since February 27 and has rejected rallies five times since then. A break out over this angle could trigger a massive rally to at least .8058.
The main trend turns up on a trade through .7937. Downside support is at .7816 and .7676. Aggressive counter trend traders could try to buy this break. However, be careful chasing the market at the current level until the breakout confirms because of the chance of a closing price reversal top.
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