Forex Weekly Forecast & FX Analysis February 17 - 21
FTSE 100: Bullish
The British stock index printed the highest rate since January 24 this past week but failed to maintain the bullish momentum and closed the week with a moderate loss of -0.26%. The long upper shadow on the weekly candlestick underlines the strong defensive barrier for the sellers above the psychological mark of 7500 points, however, the general technical outlook remains positive and here is why.
The recent formation with two consecutive lows on the daily chart reminds a reversal head-and-shoulders pattern, which is supposed to finish the bearish retracement started on January 20 after the index peaked near the recent top from July 2019. As far as the neckline coming at the close rate on January 27 is not breached and the index value keeps charting higher highs, the pattern is in play, promising further buying pressure. On top of that, the benchmark finished the previous week above the long-term exponential moving average with a period of 144 days, which is a bullish sign.
Daily oscillators have a mixed bias. The Chande Momentum indicator points to bullish sentiment, even though its value bounced off the local peak but remained above zero. Stochastic RSI performed a bearish crossover but did not leave the overbought territory, so the sell-signal is not confirmed yet. There might be another attempt to breach the reversal formation with a downside whipsaw in the upcoming days but if the bears failed to close a day below the 144-days EMA, then a strong buy-signal would occur. So the buy-dips trading strategy looks reasonable for the week ahead with long positions in the range of 7350/7400 points. Traders should keep stop-loss orders tight in this case and monitor the sequence of daily close rates to exit the market in a worst-case scenario. However, the rewards-to-risk ratio is quite lucrative as the near-term target (7600 points at least) is far above the current level.
DXY: Bullish
The U.S. dollar index is nearing the highest value since the peak on October 1 as the result of an impressive bullish rally started on February 3. The greenback gained strength versus the volume-weighted basket of six major currencies for 9 days out of ten, and the buying pressure seems to continue in the week ahead as the technical sentiment is in favour of the bullish scenario.
Williams Alligator is in the eating mode with all of the lines placed in the correct order to proceed with the uptrend, and the distance between them is growing. The MACD trend indicator is also bullish with both lines at extreme levels never seen since November 2018. The histogram is green and growing, which means that a threat of potential bearish divergence is not in play any more as the recent peak is breached. Fast and sensitive Relative Strength Index with a period of 13 days has entered into the overbought territory, which never happened during the strong uptrend in 2019. However, there are no signs of a reversal yet, and the index could keep rising despite extremely high levels of the oscillator. The distance to the yearly peak is very small, so the bulls would not waste a chance to test it. If they were able to breach the horizontal static resistance, then the road to 101.26, the highest value since April 2017, will be open.
EUR/USD: Bearish
The single European currency renewed the lowest rate of 2019, declining versus the U.S. dollar for 9 days out of 10. EUR/USD breached the static horizontal support at 1.08986, the lowest daily close printed on September 30. From a technical analysis point of view, this bearish achievement is extremely negative for the pair as the market players now eye the long-term descending support trendline on the daily chart below.
Although most of the technical indicators show extremely oversold conditions, the selling pressure is likely to continue in the week ahead. The buyers had to remove postponed orders to a range of 1.0635/0770 because even the demand for EUR/USD from real-money accounts failed to hold the bearish rally, while the net volume of short positions jumped to the highest level in 24 months. Another bearish sign comes from the Average Directional Index, the mainline of which crossed the threshold from below, underlining the growing bearish momentum. If things continued in the same way, EUR/USD could reach the target mentioned above sooner rather than later. The negative surplus between -DI and +DI values reflects the current market’s sentiment.
Strong and sustainable trends require healthy retracements from time to time. A bullish rebound towards 1.0900/40 would give a perfect opportunity to join the party for those traders who missed the chance to short EUR/USD two weeks ago. But such a scenario seems unlikely so far as the bearish rally keeps gaining the momentum. Therefore, a breakthrough trading strategy might be lucrative in the week ahead. A sell-stop order below 1.0798 with a target of 1.0750 and 1.0700 in extension could bring a decent and quick profit for intraday traders. Long-term and swing speculators should keep holding shorts for EUR/USD in their portfolios until at least 1.0635 dollars per Euro.
GBP/USD: Bullish
The Sterling surprised Forex traders this past week, climbing back above 1.3000 versus the U.S. dollar, exactly as we suggested in our previous forecast. For the technical analysis, that means that the breakout of the support level at 1.29359 was fake and GBP/USD is heading towards the upper band of the recent consolidative channel at around 1.3150 (see the blue descending resistance trendline on the daily chart below). Of course, Sterling’s strength was mainly supported by its crosses rather than by the greenback’s weakness, however, that does not decrease the value of the recent bullish price action for the further trend.
The technical sentiment is mixed though. A combination of the Bollinger Bands and Stochastic RSI on the daily chart setup provided a perfect buy-signal last Monday when the rate breached the lower band of the BB indicator but the oscillator performed a bullish crossover in the oversold zone and crossed the threshold from below after that. As a result of the trading week, GBP/USD closed Friday above the BB middle line, which should change the sentiment to bullish at least in the near-term perspective. However, both lines of the Stochastic RSI oscillator are still below the middle level, which adds uncertainty to the equation. Therefore, Sterling bulls should lift the exchange rate above 1.3100 to convince the market about a potential re-test of the local peak at 1.3200. Otherwise, Forex traders would see another bearish wave of the sideways consolidation towards 1.2900.
EUR/GBP: Bearish
Thanks to the different performance of the majors, the EUR/GBP cross-rate closed the trading week at the lowest level since the Brexit vote in June 2016. The weekly plunge of the exchange rate exceeded -2.25% or 191 pips, which was the largest decline since September 2017. EUR/GBP stopped plunging just two pips above the psychological barrier of 0.8300 Pounds per Euro last Friday. However, the technical analysis suggests that such a sharp bearish rally is just the beginning of a long-term downtrend before the cross-rate comes back to pre-Brexit levels.
The squeezed weekly chart below shows that EUR/GBP has a whole abyss to go south before reaching the long-term bottom at 0.6940 noticed in June 2015. The nearest technical support is a horizontal static level highlighting the local peak in April 2016, and it is 230 pips below the current rate. The breakout of the long-term simple moving average with a period of 377 weeks (one of the Fibonacci numbers, 7 years and 3 months or 31 quarters) cannot be underestimated for the technical analysis. The cross-rate had five attempts to get closer to the curve and all of them failed. The closest test of the support was noted in the week of December 9, 2019, which led to the bullish rebound and six-weeks consolidation before resuming the downtrend. But now the bears have finally cracked the last bulls’ defensive barrier, which might lead to an acceleration of the selling pressure on EUR/GBP. Even the smallest rebound towards the previous support now resistance at 0.8342 should be considered as an opportunity for potentially lucrative short positions targeting several goals mentioned on the chart. Forex traders should forget about long positions for EUR/GBP as standing against such a strong trend at the very beginning of it would look like suicide for the account balance.
