fx analysis technical outlook 4 909492015

USD/CAD

The US dollar strengthened last week as US crude oil (WTI) dropped under $50 in reaction to data showing that US oil inventories unexpectedly rose by over two million barrels in the prior week.

The Energy Information Administration reported on Wednesday that US crude oil stocks shot up by 2.5 million barrels, while analysts were expecting a drawdown of around 2 million barrels. This data helped confirm Tuesday’s report by the American Petroleum Institute, which showed a rise of 2.3 million barrels last week.

 

This combination of continued US dollar strength and persistently weak crude oil prices pressuring the Canadian dollar prompted the USD/CAD currency pair to break out to a new six year high above 1.3000 resistance. Wednesday saw a peak of 1.3101, a high not seen since September of 2004.

For the past year, the currency pair has been trading within a strong bullish trend framed by a well-defined uptrend line extending back to July of last year. That trend line was tested on a pullback in mid-June, but for the past month, USD/CAD has advanced almost unceasingly to its current heights.

With the US dollar continuing to strengthen and crude oil continuing to be pressured by persistent oversupply conditions, USD/CAD could well have further to run before making any significant pullback or correction. In this event, the next major target to the upside is at the 1.3200 resistance level. Strong downside support on any pullback remains around the 1.2800 level.

EUR/USD

EUR/USD extended its bounce up to key resistance around the 1.1100 level to start off the new trading week. In the process, the currency pair also touched its 50-day moving average to the upside. This has established a two-week high for the currency pair.

Despite the rise from 1.0800 support during the past week, downside risk continues to pressure the euro, even as the prospect of a Greek exit of the common currency has been subdued for the time being. At the same time, the US dollar has long appreciated against the euro and currently has even more reason to do so with a looming interest rate hike potentially on the horizon.

 

While EUR/USD continues to trade within a long-term downtrend extending back to the 1.4000-area high back in May of last year, the past three months have seen more of a sustained, but often volatile trading range generally between 1.0800 support to the downside and the 1.1400 resistance region to the upside.

In the short-term, if the noted 1.1100 resistance level is broken to the upside, the currency pair could continue to rise within this range towards its 200-day moving average and intermediate resistance around the 1.1275 level.

On a longer-term basis, however, the EUR/USD continues to be biased towards a continuation of the longstanding downtrend. This continuation would be helped along by a breakdown below the noted 1.0800 range support level. In this event, the major downside support target is at the 1.0500 level, which is the area of March’s twelve-year low and site of a rough double-bottoming pattern in March and April. A further break below 1.0500, which would confirm a continuation of the long-term downtrend, could pressure EUR/USD towards further downside support around the 1.0200 level.

 

GBP/USD

GBP/USD has consolidated around the key 1.5500 psychological support/resistance level. This consolidation occurs after a slide on Thursday of last week when data releases in the UK and US pressured the pound and prompted another surge in the dollar. Thursday’s GBP/USD drop gave back much of the gains made initially on Wednesday that were triggered by the Bank of England releasing its Monetary Policy Committee minutes.

Retail sales data from the UK on Thursday showed an unexpected decline in June of 0.2% from May. Analysts had expected a 0.4% increase. In addition, unemployment claims in the US were also released on Thursday, showing a plunge in jobless claims to 255K last week, the lowest in four decades. Analysts had been expecting 279K claims.

 

This combination of vital economic data from both countries drove the GBP/USD back down to its 50-day moving average and the lows of the tight trading range that has been in place for the past week and a half. Last week also saw a dip below the noted 1.5500 psychological support level.

The current range-bound price action has been the result of shifting speculation regarding both UK and US interest rate hikes. Both the Bank of England and the Fed have signaled intentions to raise rates, but the timing of such hikes have been uncertain.

As it currently stands, GBP/USD continues to trade within a moderately bearish range. With any sustained breakdown below the noted 1.5500 psychological support level, the currency pair could drop back down towards its 200-day moving average, where a one-month low was established just two weeks ago. Below the 200-day average is a major downside support target at 1.5200, which is the area of the early June lows.

To the upside, short-term resistance within the context of the current trading range remains around the 1.5675 level.