Currencies have remained volatile over the past week, and just when it looked like the US Dollar Index would resume its bull trend, the market has reversed and is now testing key levels for DX bulls. I have been watching this 82 level as key support, and we were breaking below that level this morning. However, I am starting to see some divergences in the currency market, as the British pound has been strong, but the Australian dollar has been relatively weak. So I am going to be a little patient today with DX long positions, and see which way things go from here. If the US Dollar Index can’t get back above the 82 level in the next couple days, and especially if we see a close below the 81.75 level, it might be time to get back on the short side of the US dollar. We will have a lot of headline noise with the Fed starting to meet today and the ECB decision looming, so be careful…the next few days will be volatile!
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A big reason for recent US Dollar Index weakness has been the euro bouncing off the 200-day moving average and holding round number support around the 1.30 level. Rallying back up to the underside of the 1.32 level looks like a very good risk reward short opportunity to me, which is another reason I am inclined to give DX long positions a little bit of room. It looks to me like the euro should fail here below 1.32, and there is potential for a break of 1.30 support after the ECB decision. If the euro can’t hold the 200-day moving average on the next test lower, it opens the door to significantly lower prices, and I would use a target of 1.20 if we do start to see a downside break through the 1.28 level. That would start to confirm the process of a head and shoulders topping pattern forming for the euro. See below.
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The Australian dollar continues to hold my attention because it has relatively underperformed with the recent US dollar weakness. This could be an additional warning about potential future commodity weakness, as well as concerns about China slowing down. I would keep a close eye on this currency here, as it seems to me like another very attractive risk reward setup on the short side. The AUDUSD cross has been stuck in a range from 1.02 to 1.06 for almost the past year, and it has spent the past couple weeks closing below the 200-day moving average. It looks like there is downside to well below par from current levels, and short positions can be established at current levels risking basically less than 50 pips, which provide an excellent risk reward ratio. See the bearish setup below. Good luck!
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Positions in DX, M6E, M6A, MJY futures.
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