Risk assets retreated and the USD bounced back to end the past week, as traders pared positions ahead of the weekend due to the risks out of Greece. However, charts in many markets point to a potentially larger reversal in risk overall, which we have previously cautioned about as the Greek dénouement poses a classic ‘buy the rumor, sell the fact’ set-up.
Bearish engulfing lines (bearish reversal patterns after an advance) dominate the daily candles in markets ranging from the S&P 500 to AUD/USD and EUR/USD. Weekly candlestick charts show spinning tops, indicating indecision over the current directional move and potentially warning of a reversal. The US dollar index is also set finish out above the daily Tenkan line on the Ichimoku charts, another sign of a possible reversal higher for the buck and lower for risk assets. Additionally, Friday’s price declines in risk pairs have broken below clear upchannels, another indication that the recent risk rally may be reversing.
Data in the coming week is likely to highlight further risks to the global recovery, with preliminary 4Q GDP reports for Europe and Japan forecast to show QoQ declines of -0.4% and -0.7%, respectively. The RBA’s weaker outlook disclosed in their minutes released this past Friday is another harbinger of renewed caution on growth.
In terms of specific price levels, EUR/USD is testing a broken trend line from earlier highs at 1.3165/70, which is now key support. The daily Tenkan line also converges at that level (1.3174), and a daily close below would provide greater confidence that a medium term high has been seen. GBP/USD was neatly rejected by its 200 day moving average at 1.5935 and is closing back below the top of the cloud (1.5765) and the daily Tenkan line (1.5814). Further weakness below 1.5700 recent range lows would see scope to the cloud base/Kijun line in the 1.5540/80 area, at least initially. USD/JPY is diverging from the reversal in US Treasury rates at the end of the week, and we would look for it to eventually play catch up and move lower alongside US yields. This could bring an added element of JPY-cross selling if risk sentiment falters as events unfold. Overall, we would prefer to use remaining strength in risk FX as an opportunity to get short, which may occur on a final Greek relief rally.
Brian Dolan is chief currency strategist at www.FOREX.com.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.