fx analysis technical outlook 6 1299542015

EUR/USD

With all eyes on the Fed and its impending announcement of its decision on whether or not to raise interest rates this week, the US dollar will be in extremely close focus. The dollar spent much of last week in a general decline against major currencies like the euro and pound as the market speculated on the likelihood and magnitude of a September rate hike.

For the EUR/USD, this dollar decline meant a bounce off of key support around the major 1.1100 level, which was also where the 50-day and 200-day moving averages have converged.

Despite a sharp rise in late August that pushed the currency pair up to a seven-month high slightly above 1.1700, EUR/USD quickly corrected that surge and fell back under key 1.1400-area resistance, which now continues to serve as resistance for the current bounce.

Currently, the new trading week began with a pullback from near that resistance level as the dollar climbed back slightly from last week’s losses against the euro.

Despite EUR/USD’s recent bounce and recovery attempt, the longer-term trend from May of last year continues to point unmistakably to the downside. Furthermore, whether or not a Fed rate hike materializes this week, the broad-based market assumption is that an initial rate hike will most likely take place by the end of this year, or at least shortly thereafter. This expectation should continue to lend overall strength to the US dollar, in turn helping to pressure EUR/USD.

If the currency pair continues to trade under the noted 1.1400 resistance level, the clear downside target continues to be at the 1.1100 support level. With any breakdown below 1.1100, the next major target resides at the key 1.0800 support area, last retested in July.

USD/JPY

USD/JPY has been driven in the past month largely by the Japanese yen’s reactions to volatility in the global equities markets. The Japanese currency has risen and fallen in fairly close correlation with equity indices, as stock markets have experienced increased volatility recently. This, in turn, has been due in large part to market turmoil and economic growth concerns in China.

This can be seen most readily on USD/JPY around a month ago when the dramatic plunge in major market benchmarks spanning the S&P 500 to the FTSE 100 to the DAX, which was triggered in part by negative financial and economic developments in China, prompted a flight to the yen and a spectacular fall for USD/JPY.

That fall brought the currency pair down to approach major support around the 115.50 level by the last full week of August before rebounding and paring some of those losses. Late August and early September, however, brought a fresh wave of yen buying that further pressured USD/JPY.

Last week saw a rebound for the currency pair, as equity markets gained back some traction. This week, ahead of the potentially pivotal Fed decision, however, stock markets have once again reacted with volatility and USD/JPY has pulled back in kind to begin the new trading week.

Despite the potential for a surge in the US dollar as a result of any impending Fed rate hike, such a hike may also lead to further declines and volatility in the equities markets which could, in turn, lead to a further flight to the Japanese yen. This could prompt another move to the downside for USD/JPY.

As the currency pair is currently trading around the 120.00 level, any significant return of market volatility could prompt USD/JPY to fall back towards the 118.00 support level, with a further breakdown targeting the noted 115.50 support.

To the upside, any significant rebound above 120.00 should find major resistance around the key 122.00 level.

GBP/USD

GBP/USD spent the past week rebounding from just below key support around the major 1.5200 level. That rebound followed a sharp slide from a high around 1.5800 resistance in late August down to the noted 1.5200 support level by early September.

Currently trading between its 200-day and 50-day moving averages, GBP/USD has also made a pullback to begin the new trading week.

Despite the fact that the currency pair is trading well off April’s long-term low of 1.4565, the current bias for GBP/USD continues to be bearish. Whether or not the Fed decides to raise rates this week, the market currently views a Fed rate hike as most probably preceding any Bank of England rate hike. If this continues to be the case, GBP/USD should continue to be pressured.

In this event, the clear downside price objective continues to reside at the noted 1.5200 level, with any further downside move targeting the key 1.5000 psychological support/resistance level. Upside resistance currently continues to reside around the 1.5500 price level.