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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Technical Update - EURUSD, GBPUSD, USDJPY and Dollar Index. Will the very stretched trends continue?
Kim Cramer Larsson
Technical Analyst, Saxo Bank Group
EURUSD is a bit tricky at the moment. The cross has been in a downtrend for the past two months and has been quite stretched lately, but now there is a warning sign in the form of RSI divergence.
EURUSD closed lower yesterday but RSI did not which means RSI values are not confirming the lower EURUSD levels. RSI divergence is a sign of a weakening (bearish) trend.
However, RSI divergence can go on for quite some time but should be taken seriously.
The support around 1.0480 is strong – see weekly chart - and one should expect a correction. However, RSI divergence is not a reversal sign just a warning of trend exhaustion. A bottom and reversal pattern could be forming in next couple of days.
If EURUSD takes out 1.0620 expect upper falling trendline to be tested. And a possible move to at least 1.07.
However, despite a looming short-term correction the medium-term trend is bearish and if EURUSD is closing lower and RSI divergence is cancelled by lower values there is no strong support until around 1.0241. But I am very confident we’ll see a correction before reaching that level. (This is not meant as a recommendation!)
First indication of a correction unfolding is likely if RSI is closing above its falling blue trend line. A close back above the 40 threshold coulkd accelrate a corrective move higher
GBPUSD Bullish Engulfing candle was cancelled out with the bearish move yesterday (but as mentioned in previous update Bullish Engulfing patterns are not that reliable in the FX market) . Buyers ran out of steam after being rejected at the upper falling trendline cutting short the correction before it reached 1.23.
RSI is still showing negative sentiment but RSI divergence could be building as illustrated by the dashed blue line. However, the trend in GBPUSD is still down and could dip down to strong support at around 1.20 level
If GBPUSD Is breaking above the upper falling trend line it could be a strong indication of a correction unfolding. Resistance at around 1.2275
USDJPY is slowly ticking higher forming a rising wedge like pattern. There is no strong resistance until around 152 but a sell-off could hit before USDJPY is reaching that level. If USDJPY is breaking bearish out of the wedge i.e., below the lower rising trendline a move down to support at around 146.45 could be seen. Minor support at 148.50
If breaking bullish out of the wedge i.e., above the upper rising trendline the wedge pattern has been demolished.
RSI divergence is indicating a bearish breakout. However, if RSI is closing above its horizontal dashed line the divergence is cancelled. A bullish USDJPY break out of the wedge is likely to do that (pushing RSI above the dashed line thus cancelling the divergence) That would pave the road to 152 for USDJPY.
Dollar Index correction was very limited before bidders took back control. The Dollar Index is still above the lower rising trendline in the channel pattern and moving towards strong resistance at around 107.90
Now also RSI divergence is building – jury’s still out however, but indication is there and the Index could see trend exhaustion before hitting 107.90.
If breaking below lower rising trendline and below 105.34 a correction down to around 104.39 could be seen
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