FOREX TRADING

This week, The US dollar continued to loss ground to the euro, and pound, as well as to the JPY, which competes with the USD for risk-aversion-based flow. The commodity currencies such as AUD and CAD also gained on the greenback. Even gold, which has been declining is gaining again. It appears the dollar is sliding across the board. Let’s review the technical developments for this week.

EUR/USD Nears Last Resistance Zone for Bearish Outlook

Daily: The EUR/USD rallied further this week and is going to enter an upper zone of resistance.

If the market continues further but can find a top in the zone that starts at 1.3120 to 1.3250, it can still decline towards and even past the 1.1880 area.

However, a breaks suggests continual rally towards 1.35 area.

There is a bearish divergence developing. The slowdown in momentum can also be seen by looking for strong bullish candles. The strongest has waned each week.

To confirm topping, I would like to see a strong day decline that can match and preferably be wider than the ATR.

Another thing to monitor is the USD/JPY and USD/CHF. At the moment, the USD is very weak against these. If it is rallying, the chances for EUR/USD to find a top improves.

Will increase monitoring of this pair next week.

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U.S. Review

The Second Quarter Ended on a Soft Note

• Real GDP grew at a 2.4 percent annual rate during the second quarter, but recent data suggest the period ended on a weak note and point to a slower second half of 2010.
• New home sales rose in June, but downward revisions to April and May data show an even larger pullback following the end of homebuyer tax incentives.
• Advance orders for durable goods fell in June, and regional surveys show industrial activity losing steam.
• Consumer confidence fell in July, despite generally good news on corporate earnings and rising share prices.

More Evidence Of A Second Half Slowdown

Real GDP grew at a 2.4 percent annual rate during the second quarter. While the gain was slightly higher than the reduced market expectations, most of the strength occurred earlier in the quarter and the revisions to previously published data show the recession was deeper than first reported and the recovery in private final demand has been much weaker.

There is a growing debate about whether the economy will need more fiscal and monetary stimulus during the second half of the year. The argument for stimulus got a boost from a paper released by Mark Zandi and Alan Blinder that shows the extraordinary efforts taken by the Treasury, Federal Reserve and the Congress that helped to stave off a much more dire economic outcome than what actually transpired. Altogether, around $4 trillion in fiscal and monetary stimulus was thrown at the economy. While this spending may have averted a deeper recession, or even depression, it has not done much to promote economic growth over the past year. With most of the spending now behind us, the debate is shifting to whether policymakers should do more of what has already been tried, do less or do something different.

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HIGHLIGHTS OF THE WEEK

• A slew of positive macroeconomic data across Europe lifted market sentiment, underpinning the euro
• European financial stocks were up sharply and sovereign debt spreads narrowed significantly
• U.S. second quarter real GDP came in to the downside of expectations at 2.4% (annualized). Downward revisions to past growth show a deeper recession than previously thought with a peak-to-trough decline of -4.1%.
• Real consumer spending comes in weak at 1.6% (annualized) in Q2. Consumer spending growth is also up a meager 1.6% from its trough a year ago.
• St. Louis Federal Reserve President James Bullard says the U.S. is as close to a deflationary threat that it has even been and recommends the Fed do more to anchor inflation expectations.
• Canadian economic activity improves marginally in May, with real GDP growing by 0.1%.
• Goods-producing sectors, as in the past, are driving the recovery; however, these were also the sectors responsible for much of the decline in economic output.
• In particular, manufacturing, mining, oil, and gas extraction, transportation & warehousing, wholesale trade and retail trade have accounted for most of the peak-to-trough decline in overall real GDP, and the subsequent growth thereafter.
• If the 1980′s recession and recovery was a capital ‘V’, then undoubtedly the 2008-2009 recession would be a lower-case ‘v’.
• Overall, the current recovery will continue to be driven by goods-producing sectors such as manufacturing, construction, and mining, oil, & gas extraction due mainly to capacity underutilization.

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Market Outlook

Tactical view:

= PMIs to test bullish GBP/USD trend, GBP/CAD target 1.65

Dollar weakness coloured G10 fx markets in July but a stabilisation in speculative positioning begs the question if the currency is due for some reprieve in August. The path to a USD bounce remains uneven at best, but as the tide of positive Q2 corporate earnings subsides and scepticism surrounding EU peripheral spreads lingers, we wonder if safe haven flows could make a surprise return. Dovish statements by the BoE have so far been disregarded by GBP bulls but as the policy stakes are gradually raised, we think there is a possibility that GBP exposure is gradually reduced from technically overbought levels. The week ahead is dominated by the PMIs and US non-farm payrolls. Holiday disrupted trading conditions are likely to characterise daily flows. Demand for carry may keep the AUD underpinned even assuming for no change in RBA policy.

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A weak and weakening American economy has undermined the strength of the dollar for the entire month of July and this week’s economic information provided no relief for the US currency. Since Monday the greenback has declined more than 1% versus the euro, 1.9% against the sterling, 1.1% for the Aussie. Only the Canadian Dollar, tied by economic proximity to the US economy and the Japanese Yen, embedded in its own economic morass, were relatively unchanged in the general US decline.

In the past four weeks the euro has gained 7.1%, the pound sterling 4.9%, the Australian Dollar 7.7% at the expense of the US Dollar. Even the yen has forged 2.2% ahead. Except for the Australian currency and to a small extent the pound, these appreciations are not based in resurgence in the national economies but in a clear change in the tenor of American economic performance.

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Highlights

• Growth concerns weigh on dollar
• Beige Book sees modest increase in economic activity
• Central banks in emerging markets scale down rate hike plans

Emerging Markets: Central Banks are Becoming More Cautious

This week, EUR-USD firmed again somewhat to 1.30, even touching 1.31 briefly. The euro also rose slightly against most non-European currencies. The main reason for the movement was the diverging economic climate: both the macro data for the euro area and corporate quarterly earnings made a positive impression, especially against the gloomy backdrop of the sovereign debt crisis. The US indicators, on the other hand, underline the impression that growth has slowed down. Given the mediocre corporate results, the US equity market tended to move sideways.

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EURUSD Outlook

The EURUSD finally made a clear break above 1.3000 resistance yesterday, topped at 1.3106 but closed a little bit lower at 1.03075. This fact could trigger further upside pressure testing 1.3213/70 region before testing 1.3340. However, as you can see on my daily chart below, we have a trendline resistance which is located around 1.3120 that need to be broken to the upside before continue the bullish pressure. Immediate support at 1.3045/20 region. Break below that area could lead us into neutral zone in nearest term testing 1.2950/30 support area but overall we are still in strong upside phase and I still prefer buy on dips.

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EUR/USD closed higher on Thursday and is challenging the 38% retracement level of the 2009-2010-decline crossing. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are diverging but are bullish signalling that additional short-term gains are possible. If it extends the rally off June’s low, the 50% retracement level of the 2009-2010-decline crossing is the next upside target. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted.

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EUR/USD closed lower due to profit taking on Wednesday but remains above the 10-day moving average crossing. The low-range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are diverging but are bullish signalling that additional short-term gains are possible. If it extends the rally off June’s low, the 38% retracement level of the 2009-2010-decline crossing is the next upside target. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted.

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The EURUSD made another indecisive movement yesterday, formed another Doji on daily chart. Price still unable to consistently move above 1.3000 and we know that it is a very strong resistance, which could produce bullish exhaustion and downside consolidation unless price able to break above 1.3045 area, targeting 1.3120 before testing 1.3270 – 1.3340 region. The bias remains neutral in nearest term but overall we are still in bullish phase. Immediate support at 1.2900 – 1.2880 area. Break below that area could trigger further bearish momentum testing 1.2735 key support area.

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Today’s beige book report, compiled in preparation for the August 10 FOMC meeting, provided a much more qualified characterization of the recovery among the 12 Fed districts compared to the report prepared in advance of the June 22-23 FOMC. Although the report opened by stating that economic activity continued to grow, the qualifier “on balance” quickly followed. This qualifier reflected that while eight Districts seemingly indicated that economic activity improved, albeit modestly, two Districts indicated steady activity with two Districts, Atlanta and Chicago, indicating the pace of activity had slowed recently. In June, it was indicated that economic activity had improved in all 12 Fed Districts. (more…)

EUR/USD closed higher on Tuesday as it consolidates above the 10-day moving average crossing. The mid-range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI are diverging but are turning bullish signalling that additional short-term gains are possible. If it extends the rally off June’s low, the 38% retracement level of the 2009-2010-decline crossing is the next upside target. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted.

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The EURUSD attempted to push higher yesterday, topped at 1.3045 but again, failed to consistently move above 1.3000 so far. The bias is neutral in nearest term but I believe we are still in strong upside phase unless price break below 1.2735 region. Immediate support at 1.2950 followed by 1.2880. On the upside, 1.3120 remains the nearest bullish target.

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The EURUSD touched 1.3000 area yesterday but still unable to move consistently above that psychological/key level so far. On h4 chart below we can see that we may have a triple top formation around 1.3000. Consistent move above 1.3000 could trigger further bullish pressure testing 1.3120 even higher. On the other hand, break below 1.2735 confirms the triple top scenario and could be a serious threat to the current bullish outlook. Immediate support at 1.2950 (23.6% Fibo retracement of 1.2793 – 1.3005). Break below that area could trigger further bearish pullback testing 1.2875 (61.5% Fibo retracement of 1.2793 – 1.3005).

GBPUSD Outlook

The GBPUSD slipped above 1.5470 resistance area indicating potential further upside pressure at least targeting 1.5573 (February 23 high) before testing 1.5685 region (February 18 high). Another move below 1.5470 could lead us into neutral zone in nearest term testing 1.5400 but overall we are still in strong bullish phase and I prefer buy the dips strategy at this phase.

USDJPY Outlook

The USDJPY failed to continue its bullish correction yesterday and now back below 87.00. My short term technical study is a a little bit mess for this pair but overall the major scenario remains to the downside with nearest bearish target around 86.25 – 85.86 before re-testing 84.80 area. Immediate resistance at 87.50 followed by 88.23.

USDCHF Outlook

As you can see on my h4 below, the USDCHF is moving inside a rectangle area indicating consolidation after significant bearish momentum. We need a break from the range area to see clearer direction. Break above 1.0560 could trigger further bullish pullback testing 1.0650/70 while a break below 1.0399 could continue the major bearish scenario targeting 1.0320 and 1.0220 region.

EURJPY Outlook

The EURJPY was indecisive yesterday. Price so far unable to stay consistently above 113.50 area indicating limited upside pressure. Overall price still trapped in range area of 113.50 – 108.07. We need a consistent move above 113.50 to continue the bullish correction testing 115.50. Immediate support at 112.25 followed by 111.50/60 region

GBPJPY Outlook

The GBPJPY attempted to push higher yesterday, topped at 135.60 but closed lower at 134.64. Overall we are still in range area of 136.30 – 130.50 and I will keep stay away from this pair for now. On h1 chart below we have a descending triangle formation indicating potential downside pressure especially if price break below the triangle testing 133.70/20 support area. On the upside, we need a clear break above 136.30 resistance area to confirm the bullish scenario testing 139.38 region.

AUDUSD Outlook

The AUDUSD had a moderate bullish momentum yesterday. The main scenario remains bullish but the rising wedge bearish scenario warning is still there and we need price to violate the formation with strong momentum to continue the bullish scenario targeting 0.9140 before testing 0.9380 in longer term. On the downside, only a break below 0.8858 and the rising wedge formation could be considered as potential bullish failure.

EUR/USD closed higher on Monday as it consolidates above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Tuesday. However, stochastics and the RSI have turned bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted. If it renews the rally off June’s low, the 38% retracement level of the 2009-2010-decline crossing s the next upside target.

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