The Euro fell below the 1.18 level for the first time in months during the trading session on Wednesday. This of course is a break of a major round figure, so it will attract a lot of attention. I believe at this point it’s likely that we will eventually try to get to the 1.15 level, but a short-term bounce may happen between now and then. I think that the 1.1850 level will offer a significant amount of resistance above, so I would be surprised to see this market break above there. Keep in mind that part of the reason this market has been falling is due to interest rates rising in the United States, with the 10 year note breaking above 3.06% being a major driver of US dollar strength when it happens.
I think rallies are to be faded at this point, as they cannot sustain any amount of momentum. We may get the occasional short-term burst higher, but it’s only a matter of time before the sellers return. I think the 1.15 level is much more significant based upon the longer-term charts, and of course it would be a 100% retracement of the entire move that we had recently seen higher. Now that we are below the 61.8% Fibonacci retracement level, that is quite often the target. With this in mind, I believe that selling short-term rallies that show signs of exhaustion is a good way to start a position, and then you add a little bit to it every time we make a fresh, new low.
The British pound fell during trading on Wednesday, reaching towards 1.3450 level where it has found support again. However, every time we reach towards this level we are chipping away at support, and we are crossing a major uptrend line. It’s easy to think that it’s only going to take one headline to finally throw this pair over the cliff and send it much lower. At that point, I think that we go to the 1.33 handle underneath, and then perhaps even to the 1.30 level after that.
It’s already shaping up for a summer of US dollar strength, and I think that’s going to continue to be the case, even in this pair that features a currency that will more than likely get at least one interest rate hike by the end of the year. However, that doesn’t mean that there won’t be volatility, and there will be the occasional rally. I believe that these rallies are made to be sold, and at the first signs of exhaustion that’s exactly what you should be doing. I do not think that this is a market that is going to be easy to buy, at least not anytime soon.
Watch the 10-year yields in the United States, if they break above the 3.06 level for any sustained amount of time, that will plunge this pair rather drastically as money goes to where it’s treated best. I also believe that some type of major “risk off” headline could send this pair much lower as well.
The Australian dollar rallied during trading on Wednesday, breaking well above the 0.75 handle at one point, but now as I record this video it looks likely to turn right back around. I think we will continue to see the 0.75 level act as an area of extreme interest in this market, and therefore I think we will see more consolidation. On the hourly chart, it does look a bit explosive, but at the end of the day the move was only about 30 pips.
I believe the trading back and forth with perhaps more of a downward proclivity is probably how this is going to play out, as the treasury markets are starting to show signs of higher interest rates in the United States. Those higher interest rates will drive the greenback higher overall, which will put a weight on pricing of gold, one of the major factors for the Australian dollar. I believe that we will eventually fall again, perhaps trying to make a fresh, new low. However, I would not get married to any particular position, because the one thing that I think I will anticipate more than anything else is a lot of noise. With that in mind, small positions in adding if it goes in your favor is probably about as good as this gets. Longer-term, I think the 0.7350 level makes sense, but we have a long way to go before we get there.
The US dollar has pulled back a bit against the Japanese yen during trading on Wednesday, looking to the ¥110 level for support. That’s an area that was resistance in the past, so it should in theory at least be a supportive level going forward. I think that if the market can bounce from here, it’s likely to continue to see a push towards the ¥110.50 level in the short term, and then ultimately my target of ¥112.50 during the summer. I think that the market will continue to pay attention to the treasury markets overall, and if they show higher yields, that is reason enough for this market to continue the upside. I believe that there is a bit of support extending down to the ¥109 level, so it’s likely that we will see a bit of a “zone” of support. I don’t think that the ¥110 level is a “hard line in the sand”, so to speak.
Ultimately, I believe that the US dollar is going to have a strong summer, and that of course will reflect in this market as well as many of the other currencies. The session on Wednesday has seen a little bit of softening in the greenback, but when looked at through the prism of the last several days, it is simply just a small pullback. I believe that ultimately we will continue to see buyers jump in and look for those higher yields in America as the Bank of Japan is nowhere near leaving quantitative easing.