Weekly Forex Forecast (May 21 – 25, 2018)

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The EURUSD set up nicely for us at the start of last week. On Sunday, May 13 I mentioned that the close on the 11th wasn’t decisive enough to call one way or the other.

Notice how the May 11 session closed within that 1.1930/40 area. That left us waiting for the market to make the first move.

Last Monday’s bearish pin bar was all we needed. The long upper wick signaled that sellers remained in control and that shorts were favored.

The target was the 1.1830 support level, which sellers reached during Tuesday’s session. Sellers then broke 1.1830 support on Wednesday with a daily close (using a New York close chart) below the level.

That breakdown brings us to this week’s price action. At the moment, the EURUSD is trading in the middle of a new 120 pip range. Key resistance is now 1.1830 with support coming in near 1.1710.

As you might guess, I still favor shorts so long as the single currency is in this “stair step” downward trend. However, I do expect quite a bit of buying pressure to develop on a 1.1710 retest.

It’s going to take a daily close below that to expose the next key support level at 1.1570/80. And if buyers manage a close back above 1.1830, we could see a move to last week’s focal point of 1.1930.

Since closing below 1.3600 on May 2, the GBPUSD has been limited to a 140 pip range with a floor at 1.3460.

This is the same range I mentioned last Sunday; nothing has changed since then.

As such, here’s what I wrote on May 13:

Those two levels, 1.3460 and 1.3600 give us a range to keep a close eye on for the week ahead. While I’m not interested in trading the range, I am awaiting a daily close (New York 5 pm EST) below 1.3460 or above 1.3600.

If I were forced to choose the one that’s more likely, I’d have to go with a break lower given the recent selloffs. But as always, it’s best to let the market make the first move.

A daily close below 1.3460 would expose the next key support at 1.3300. Alternatively, a close above 1.3600 would target the February and March lows at 1.3760.

The same idea applies to this week. Just remember that as a general rule, the longer a market consolidates, the more explosive the resulting breakout is likely to be.

Time will tell if the GBPUSD follows this rule or not.

On Thursday I discussed a horizontal level on the USDJPY that held the key to a 112.00 retest.

What does that mean, exactly?

It means that a daily close (New York 5 pm EST) above 110.40 would likely put pressure on the confluence of resistance at 112.00. In fact, it just so happens that I wrote about this very topic in Friday’s Q&A post.

Thursday’s close did just that. The pair managed to break the 110.40 level, which means any retest of the area as new support should trigger an influx of buying pressure.

At the moment, I’m interested in buying the USDJPY on a pullback into the 110.40 support area. However, I’m also keenly aware of the fact that the risk-sensitive pair has been trending lower since the 2015 highs.

Without a close above the August 2015 trend line near 112.00, the ascending channel below may suggest that another leg lower is imminent.

In other words, ascending channel support must hold. If it doesn’t, I’ll reverse my outlook of a 112.00 retest and begin to watch for opportunities to get short.

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The EURCAD is another one I mentioned last week. At the time, the pair was trading at 1.5084, which was just above the 1.5080 support zone I pointed out in the May 16 commentary.

While it is true that the Euro cross broke below multi-year ascending channel support last week, it also bounced from descending channel support at 1.5080.

At the moment, I’m only interested in selling the EURCAD. Last Wednesday’s close below multi-year ascending channel support was significant in my opinion.

However, with the pair still coming off support at 1.5080 and 100 pips between Friday’s close and the 10 and 20 exponential moving averages (EMAs), I think a bit more patience is needed here.

To gain some insight, take a look at the price action between the 13th and 25th of April. That was nine trading days from the time the EURCAD tested descending channel support to when it retested resistance on the 25th.

If the pair follows a similar pattern this time, that puts a retest of the 1.5250/60 resistance area sometime around the 26th or 27th of this month. So we may not even get a retest this coming week.

I wanted to point this out to illustrate the amount of patience that is sometimes necessary to let a market set up. Sure, you could try to buy the EURCAD down here, but the bigger play, in my opinion, is to wait for the next leg lower from 1.5250/60.

We looked at the EURAUD on Wednesday of last week following the daily close below the 2017 trend line support. That same session broke the horizontal level at 1.5770.

Fast forward to today, and I’m still waiting for that retest of new resistance at 1.5770. It may never materialize, but with the pair trading just 50 pips above key support at 1.5620, the reward isn’t worth the risk at the moment.

Another consideration is the distance between Friday’s close and the 10 and 20 EMAs. As you may know, I use these two moving averages to represent the daily mean or average price. If a market moves too far away from them, I’ll delay my entry.

With 150 pips separating the 10 and 20 EMAs from Friday’s close, that’s certainly the case here.

That said, if we get a daily close at 5 pm EST below 1.5620, I may consider a short entry. But again, it all depends on where the 10 and 20 period moving averages are at that time.

Key support below 1.5620 comes in at 1.5480. One reason I like the EURAUD here is due to the accuracy of these horizontal levels. It makes it a bit easier to identify entries, both initial ones and subsequent entries (pyramiding) if that’s your style.

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