FX Analysis and Technical Outlook 8211 February 12th 2016

Technical Developments

• USD/JPY remains severely pressured as the dollar weakens on low Fed rate hike expectations and the safe haven yen surges on continued stock market volatility. Technical bias: Bearish.
• GBP/USD has lost upside momentum within the context of its recent rally, and could be poised to resume its bearish stance. Technical bias: Neutral to Moderately Bearish.
• USD/CAD has bounced modestly after pulling back to February lows, and could resume its uptrend on continued weakness in crude oil. Technical bias: Neutral to Moderately Bullish.
• EUR/USD has surged on a severely weakened US dollar, and could have further to run as economic concerns increasingly preclude another Fed rate hike. Technical bias: Moderately Bullish.

USD/JPY

During most of the past week, USD/JPY continued its steep plunge as severely diminished expectations of further interest rate hikes by the US Federal Reserve weighed on the dollar, and turbulent stock markets around the world pushed up the safe haven Japanese yen. This resulted in swift breakdowns below successively lower support levels this past week, including the key 116.00 and 114.00 levels. Pressure on the dollar due to radically diminished expectations of future Fed monetary tightening is not likely to abate in the very near future. Likewise, heightened fear and volatility in the struggling global equity markets appear likely to remain for the time being, which should further prop up the Japanese yen. For USD/JPY, this means that the recent plunge could potentially be extended significantly. Having reached down this past week to touch a new 15-month low slightly below 111.00, USD/JPY has seen an acceleration of its bearish momentum and could now be poised to target further downside objectives at the key 110.00 and 108.00 support levels.

GBP/USD

GBP/USD has spent the past week fluctuating in a tight range directly under its 50-day moving average and around the key 1.4500 level. This consolidation has occurred after the currency pair spent late January and early February rallying in an upside pullback from its multi-year lows above 1.4000. While critically-lowered expectations of a US Federal Reserve rate hike in the foreseeable future may have placed the dollar under a great deal of pressure, the Bank of England (BoE) is arguably even more dovish than the Fed may now be when it comes to raising interest rates. The BoE recently confirmed expectations that a UK rate hike, which has long been anticipated, will be put on hold even further, with no real indication as to when such a rate hike may occur. The monetary policy committee vote to keep rates unchanged was unanimous, and was accompanied by lower forecasts for inflation, economic growth, and wages. If the BoE consistently maintains an even more dovish stance than the Fed, it would be a clear bearish signal for the currency pair. The noted rally prior to this past week’s consolidation may in fact be little more than a conventional upside pullback within the context of a strong downtrend that has been in place since at least mid-year of last year. This rally retraced 50% of the latest slide (from the mid-December high down to January’s new multi-year low of 1.4078), before starting to retreat in early February. In the event of an extended retreat with sustained trading below the 1.4500 level, a continuation of GBP/USD’s entrenched bearish momentum could prompt a further drop to begin targeting the 1.4250 and then 1.4000 support objectives once again.

USD/CAD

USD/CAD consolidated in a tight range this past week after having made a modest bounce from its February lows. A continued drop in oil prices for most of this past week, which weighed on the oil-correlated Canadian dollar, helped USD/CAD rise off those lows. US dollar weakness in the midst of diminishing Fed rate hike expectations, however, limited that rise. While USD/CAD has, since mid-January, been mostly entrenched within a sharp pullback from multi-year highs around 1.4600 resistance, the hammer candle in early February that reached down to a new year-to-date low of 1.3638 prompted a pivot back to the upside. Could this be signaling a potential end to the recent pullback, especially in light of persistently depressed oil prices? From a longer-term perspective, the currency pair continues to trade within a strong bullish trend, despite the noted pullback in late January and early February. With the prospect of a successful oil output deal somewhat difficult to imagine given strong underlying differences among major oil-producing nations, continued weakness in crude could be one of the catalysts that potentially propels USD/CAD to new highs. In the short-term, the key 1.4000 psychological resistance level continues to be the major level to watch. With any sustained breakout above 1.4000, the currency pair could be on track once again to target 1.4200 resistance followed by a potential retest of the noted 1.4600 resistance level further to the upside.

EUR/USD

EUR/USD spent much of the past week continuing its rise above the 1.1100 level as the US dollar weakened significantly due to an increasingly dovish Federal Reserve. Whereas the months of December and January saw the currency pair consolidate within a tight trading range just above the key 1.0800 support level, the arrival of February brought increased concerns over turbulent financial markets, plunging crude oil prices, and slowing economic growth on a global basis. In turn, these concerns severely dampened speculation over future Fed rate hikes and led to broad-based dollar-selling. This has been manifested as a strong surge in the EUR/USD that broke out above the noted 1.1100 resistance level, and then followed-through to the upside to rise well above 1.1300 at its height this past week. As the probability of further rate hikes by the Fed in the foreseeable future continues to diminish, the dollar could continue to undergo increased selling pressure, which could propel EUR/USD further up towards major resistance areas around 1.1500 and then 1.1700. To the downside, any sustained move back below 1.1100 support (previous resistance) would be a significant bearish indication that would invalidate the recent upside breakout.