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Weekly FX Market Update & Technical Analysis.

Global financial markets are full of optimism ahead of essential events this week. Equities are gaining strength across the globe, the risk appetite is rising and the demand for high-yield currencies is robust. The US dollar index measuring the greenback’s strength versus the volume-weighted basket of six major currencies is under the selling pressure, losing 0.68% of its value in two days. The market players have already absorbed comments by the Bank of Japan and started focusing on the two other major Central Banks’ meetings and press conferences – the US Federal Reserve and the European Central Bank. This post is aimed to provide a market update and technical analysis for several hot assets to trade this week.

The Bank of Japan left the interest rates unchanged, which was rather predictable. Traders and investors were waiting for the regulator’s comments in terms of macroeconomic forecasts and further supportive measures. BoJ promised unlimited bond purchase, adjusted the GDP forecast to decline by 5% this year, and predicted the inflation level to remain below 2% in three years. That statement was slightly more optimistic than the IMF’s outlook, however, the FX market did not have a significant reaction.

The US dollar started sliding across the board much later, and USD/JPY was declining by -0.79% mainly because of the overall market sentiment rather than due to the regulator’s comments. The pair has breached a crucial technical support at 107.10 and kept sliding towards the next intraday handle at 106.50 yens per dollar. 

Below is the intraday chart with one of the Alpha Generation trading tools, a proprietary technical indicator developed by professional technical analysts with over 20 years of experience at Trading Central. According to the Analyst View instrument, the USD/JPY currency pair is vulnerable to further decline with the pivot point at 107.10 (resistance) and intraday targets at 106.40 and 106.10 in extension. Since now, this powerful indicator is available for all Juno Markets live accounts for free.

Below is the same 4-hourly timeframe but with another set of technical indicators. The rate is constantly below the Ichimoku Cloud and it dropped below the Conversion Line, which is a strong bearish sign. The Average Directional Index has expanded its negative surplus between -DI and +DI lines, while the ADX mainline kept rising, underlining the growing bearish momentum. The 14-bars RSI declined and tested the oversold zone from above. 

The single European currency gained strength versus the US dollar, testing the resistance trendline of the long-term downtrend at 1.0890 and bouncing back down to 1.0850. The key fundamental events in the economic calendar are the Fed’s and ECB meetings, rate decisions, and press conferences. Before both regulators meet, quarterly GDP reports are scheduled to release. Usually, first readings of Q1 GDP are the most market-moving events compared to further revisions. 

Most of the analysts suggest that the Eurozone economy might have had a less negative impact from the pandemic than the US as European countries started the lockdown measures three weeks later than major US states. The market consensus is as follows: US GDP Q1 is forecasted to decline by -4.0% quarter on quarter, while the EU GDP is predicted to decline by -3.2% in the first quarter. Any significant shifts of actual figures on both sides could cause sharp swings in currency pairs. Thus, a higher level of volatility is expected on Wednesday and Thursday. 

From a technical analysis point of view, the EUR/USD currency pair is in the long-term downtrend with the nearest resistance level at 1.0990, the daily high rate charted on April 15. Until daily quotes remain below that pivot point, EUR/USD is vulnerable to further selling pressure. So the sell-highs trading strategy is reasonable, especially in the scope of possible upside whipsaws during the upcoming release of essential macroeconomic reports. 

The 4-hourly chart below shows multiple resistance levels coming between 1.08777 (Bollinger Bands upper line) and 1.08944 (144-bars simple moving average). If the bulls were able to lift EUR/USD through those levels, then the bullish momentum could get a boost and the upside action might accelerate as the result. On top of that, a possible spike in the volatility might widen those technical ranges significantly, and traders could see much higher bullish whipsaws on Wednesday. 

On the other hand, the US GDP report and/or FOMC statement could come in much worse than expected. The Federal Reserve could be forced to announce further supportive measures and additional liquidity to pump into the financial sector. Such a scenario might cause a large spike in demand for the US dollar as the world’s reserve currency. Thus EUR/USD could reverse the intraday uptrend and drop towards the daily support at 1.0710 and 1.0630 in extension. Therefore, FX traders should keep their take-profit and stop-loss orders tight, as well as be ready to react to fast-changing market conditions.

As far as both EUR/USD and USD/JPY have a bearish bias on the daily timeframe, the EUR/JPY cross-rate could accelerate the downtrend in the long-term perspective. The pair was testing the 8-months low in the range of 115.73/87 on Tuesday, and a potential breakout could lead to the downtrend acceleration with a mid-term target at 113.00 yens per euro. 

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