While many traders believe the EUR/USD will continue declining to 1.27, there are signs it will continue moving to 1.42…
The USDX market
As it was forecast, the USD index showed good performance and reached 80.50 by the end of the week. According to the Commitments of Traders report published on February 15, 2013, hedgers do not consider the USD to be highly undervalued or overvalued relatively to the major currencies: the hedger cot index value is equal to 68%. At the same time, the Williams’ commercial index declined to 58% (+6 percent points). Although hedger net positions were expected to increase, they slightly decreased during the week to -3976.
The large speculator and small trader COT indices also stopped moving towards the oversold signal zone of 0-20%. The large speculator remained at 31% but small traders were fast to react to the uptrend and increased their net position what moved the small trader COT index to 52% (+42 percent points). The open interest significantly declined meaning there is a place for current uptrend continuation: the COT index dropped to 29% (-25 percent points).
Summarizing, none of the three categories of traders or the open interest indicate that the USD index is overvalued or undervalued. Thus, the most probable scenario is the uptrend continuation during the upcoming week.
Figure 1: USDX futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
Figure 2: Net positions of hedgers, large speculators and small traders in the USDX market. History: from Jan 2011 to Fed 2013
During the last week, two daily levels were formed, but on Monday, February 18, the daily resistance at 80.50 was broken through meaning the uptrend will continue. However, the uptrend is limited by strong resistances at 81-81.50. Therefore, traders should expect the uptrend to continue for 1-2 weeks till the USDX index reaches 81-82.
Figure 3: USDX, daily candlesticks. History: from Mar 2012 to Feb 2013
The EUR/USD, GBP/USD and USD/CHF markets
According to the Commitments of Traders, hedgers who are operating in the EUR/USD market still consider it to be overvalued: the hedger COT index is still equal to 0% despite the EUR/USD exchange rate declined from 1.37 to 1.33 (see Figure 4) during the past two weeks. The large speculator and small trader COT indices are equal to 96% and 100%, respectively. Their positions are also indicating that the EUR is seriously overvalued relatively to the USD. It is not surprising because the first time we saw indication of the fact that the EUR/USD exchange rate is overvalued was when it was 1.31. An interesting observation is that hedger net positions continue decreasing.
Figure 4: EUR/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
The exchange rate tested the monthly resistance at the level of 1.35, where the monthly Fibonacci level 50.0 is situated. It is a good sign for those who are short in the EUR/USD market.
During the previous week the daily resistance at 1.33 was formed which is still has to be broken through. If this happens, the downtrend will continue to 1.30-1.31. However, a further decline is still questionable and short traders should not be too optimistic about this trend: it is too early to expect the downtrend to continue to 1.27 because there is a strong weekly support at 1.3.
Figure 5: EUR/USD, daily candlesticks. History: from Mar 2012 to Feb 2013
As it was forecast in the last article, the GBP/USD exchange rate continued declining. Although Commitments of Traders reports indicate the market was undervalued, the downtrend observed in a daily time frame was very strong and still has a potential to reach 1.53-1.54.
The hedger COT and WILLCO indices are equal to 100, respectively. The large speculator and small trader (investor) COT indices are equal to 0% and 2%, respectively. All traders indicate that the market is undervalued and an uptrend can start at any moment. However, the open interest is still very high indicating the market is overheated: the COT index is equal to 80%.
Figure 6: GBP/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
The exchange rate has declined below the daily support at 1.55 and will probably reach 1.53-1.54 by the end of this week. Traders should expect a flat trend for the following 1-3 weeks and only in the middle or end of March a powerful uptrend in the market.
Figure 7: GBP/USD, daily candlesticks. History: from Mar 2012 to Feb 2013
The last currency pair I would bring to your attention is the USD/CHF. According to the COT reports published on Friday 15, hedgers still consider the Swiss franc overvalued relatively to the USD: the hedger COT index and William Commercial index are equal to 18% (+2 percent points) and 10% (-2 percent points), respectively. At the same time, the large speculator and small trader COT indices are equal to 71% and 90%, respectively. Finally, the open interest COT index is equal to 33%. Summarizing, the market is undervalued and fundamentally the uptrend in the USD/CHF (downtrend in the CHF/USD) market should be expected.
Figure 8: CHF/USD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013
However, the USD/CHF exchange rate has reached the daily support at 0.9270 which currently works as a market resistance. If this level is broken through, traders should expect the uptrend to continue to 0.94 where another daily resistance is situated. In addition, a monthly Fibonacci level 50.0 is placed right at 0.94 too. Otherwise, the market will return back to 0.90-0.91.
Figure 9: USD/CHF, daily candlesticks. History: from Mar 2012 to Feb 2013
The forecast wrap-up is the following:
· The USD index increase to 81-81.5
· The EURUSD rate decrease to 1.30-1.31
· The GBPUSD rate decrease to 1.53-1.54
· The USDCHF increase to 0.94
Information about the analytical review and forecasts
The fundamental analysis is based on the Commitments of Traders (COT) data published by the Commodity Futures Trading Commission (CFTC) and the cross-market connections. The technical analysis is based on support and resistance levels.
More information regarding the COT data can be requested from the author of this review or found on the Commodity Futures Trading Commission’s website www.cftc.gov.
Information regarding the interest rates mentioned in this article can be found on the ECB and BoE official websites.
The COT Indices used in this review are calculated using 26 week historical data. The Standard Deviation indicator takes into account volatility of last 5 days.
Open or close your position only after careful consideration. The additional analysis is needed to identify the points for the entrance into and exit from the markets bearing in mind your own money management strategy. Author is providing the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.