FX.co ★ While USD index is showing good performance, the EUR/USD is heading towards 1.28

Outracing the last forecast, the USD index has reached the level of 81.50 in less than one week, and there are reasons to expect its growth continuation to 83 or even 84, while the EUR/USD exchange rate will be plummeting towards 1.2800, and the GBP/USD rate will be falling towards 1.5000-1.5100.

The USDX market

According to the Commitments of Traders report published on February 22, 2013, the hedger COT index value dropped to 45% (-23 percent points) which is a result of hedger reaction on significant USD strengthening, however market insiders believe the USD has quite a fair value being equal to 81-81.50. At the same time, the Williams’ Commercial index (WILLCO) declined to 32% (-26 percent points) as a result of not only hedger net position decrease, but also open interest increase. The open interest increased by 8% in one week. This increase made the open interest COT index drop to 40% (+11 percent points) showing that the market is slowly overheating.

The large speculator and small trader COT indices started increasing towards the overbought zone of 80-100%. The large speculator index increased by 20 percent point to 51%, while small traders again were reacting faster to the uptrend and significantly increased their net positions what moved the small trader COT index to 100% (+48 percent points).

Summarizing, only small traders indicate that the market is overbought, however they are very faster in reacting to market trends. The level of open interest and the behavior of traders indicate that the trend may continue.

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

According to the volatility and volume level, the current uptrend is quite strong. Although on Friday the USDX stayed close to weekly resistance but did not break through it, there is still a high probability of the uptrend continuation to 82.50-83.00. A confirmation that the USD index will continue growing is a breakthrough of the weekly resistance at 81.50. Therefore, traders should be ready to go long.

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 reports, despite the fact that the EUR/USD exchange rate has significantly declined, hedgers believe the EUR is still way too expensive relatively to the USD. It is indicated by the hedger COT index which increased by only 3% (it was zero last week). The Williams’ Commercial Index also increased by only 3% because the open interest remained at the previous week level: the open interest COT index declined from 41% to 38%. The large speculator and small trader COT indices are equal to 92% and 97%, respectively. Current positions and open interest state says there is plenty of reason for the EURUSD rate to decline, however the graphical analysis will remove the scales from traders’ eyes and tell how far it can go.

Figure 4: EUR/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

At the beginning of the week, the exchange rate consolidated close to the 1.3000 level where it previously was consolidating in the middle of January before breaking through the monthly resistance at 1.3500. However, after a clearly quiet market, the next volatility burst happened on Wednesday and the daily support at 1.3000 was easily broken through. The exchange rate declined to 1.32 where the weekly Fibonacci level and the trend line crossed.

Although on Friday we observed a consolidation in the market, according to the volume level, the trend is still strong. Therefore, traders can expect a consolidation of the exchange rate at the beginning of the week, but the rate will reach the weekly support at 1.3000 by the end of the week. Also note that, considering the COT reports, there is a high chance of downtrend continuation towards the next support level at 1.2675-1.2700 where, in addition, another Fibonacci level is situated.

Figure 5: EUR/USD daily candlesticks. History from Mar 2012 to Feb 2013

Despite expectations that the flat trend will be observed in the market during the week, the GBP/USD exchange rate plunged from 1.5500 to 1.5161. Although, according to the Commitments of Traders reports, the market is undervalued, the downtrend observed in a daily time frame is still strong and may reach 1.50.

The hedger COT and WILLCO indices are equal to 100 respectively indicating hedgers believe the GBP is too cheap comparing to the USD. Both the large speculator and small trader COT indices are equal to 0% also indicating the GBP/USD exchange rate is below its fundamentals. However, the open interest continued increasing: it has grown by more than 13% since the previous week. As a result, the open interest COT index is equal to 100%.

Figure 6: GBP/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

In addition to the open interest increase, the volatility (standard deviation) in the market is steadily growing, and the volume is also very high. Finally, the GBP/USD broken through the monthly support at 1.53 showing how powerful this downtrend is. Although the rate may return above the monthly rate, there are reasons for the downtrend to continue and reach a level of 1.5100 or even 1.5000. Thus traders holding short positions should take their time to close them, though precautions are good, and it is not a bad idea to fix some of the profits using stop loss orders.

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, the Swiss franc is not considered by hedgers to be overvalued relatively to the USD: the hedger COT index increased to 43% (+25 percent points). The WILLCO also increased significantly: by 27 percent points supporting the hedger COT index. The open interest is also on its average level: the COT index is equal to 37%. Finally, the large speculator and small trader COT indices are equal to 48% and 69% respectively stating the USD/CHF market is close to its fundamentals.

Figure 8: CHF/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

However, the daily level at 0.9270 which worked both as a support and as a resistance line was easily broken through. The USD/CHF exchange rate has place for growth to 0.94, thus the forecast stays the same: a potential growth to 0.94 where a daily resistance and the weekly Fibonacci level are situated.

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 82.50-83.00 if the weekly resistance is broken through.

· The EURUSD rate decrease to 1.3000-1.3100 and potential plummeting to 1.2700 during the following weeks.

· The GBP/USD rate decline to 1.5000-1.5100.

· The USD/CHF increase to 0.9400.

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. The volume indicator takes into account volume in the most liquid futures market. For example, for the EUR/USD it is the EUR/USD futures traded on CME Group exchanges.

Open or close your position only after careful consideration. The additional analysis is needed to identify the entry and exit points bearing in mind your own money management strategy. The author is providing the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.