FX.co ★ The GBP/USD is set to reach 1.4700, but the EUR/USD may return to 1.3300

At the end of the week the USD index moved up again, and on Friday tested the resistance level at 83.00. At the same time, while the EUR/USD market consolidation was observed in a range from 1.3000 to 1.3150, the GBP/USD exchange rate continued decreasing and closed below 1.5000 and is heading towards 1.4700. Will the EUR/USD rate follow the British pound market and decline by 300 points more?

The USDX market

According to the Commitments of Traders report published on March 8, even more hedgers believe the USD is overvalued relatively to the major currencies: the hedger COT index declined to 9% (-11 percent points). Note that data contained in the COT report is collected on Tuesdays. Compared to the previous week, the market went up from 81.50 to 82.50, but by the end of the week it closed at 82.72 after testing the 83.00 level. The open interest COT index increased by 5 percent points this week and reached a maximum 100%. It shows that the market is overheating, and this is the last phase of the uptrend. The Williams’ Commercial index (WILLCO) declined to 12% (-9 percent points). The index is finally within the critical area of 0-20% indicating the market is overvalued and overheating.

The large speculator COT index increased to 82% (+9 percent points), while small trader COT index stayed at the 100% level for the third week in a row. General public is going long on the last bits of the uptrend in the market. Summarizing, all five indicators show the USDX market is overbought. However, this is only the second week we receive this sell signal, therefore traders should be ready for a flat trend or uptrend continuation, thus I recommend to look on the open interest and volume.

Figure 1: USDX futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

The first half of the week traders could observe a market consolidation in a daily time frame, however by the end of the week the volatility level increased significantly. A monthly Fibonacci 23.6 was broken through easily and the USDX stopped only after testing the resistance level at 82.90. According to the level of volume which significantly increased from the beginning of the week traders’ interest increased in the market movements. In addition, according to the Delta Volume, long traders were prevailing in the market on Friday meaning there is an upside pressure in the USD market. Considering the length of the uptrend without serious correction, most probably we will observe a market consolidation during the week, while there is a possibility for the growth to 84.00 where a monthly resistance is situated. Traders should be ready to go short but also should not be in hurry and consider trends in the EUR/USD and GBP/USD markets.

Figure 2: 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, traders do not consider the EUR/USD exchange rate to be overvalued anymore. After the rate declined from 1.37 to 1.30, it continued varying between the weekly support level at 1.3000 and the monthly Fibonacci 38.2. The hedger COT and the Williams’ Commercial indices are equal to 40% and 39% respectively. Considering the fact, the EUR/USD exchange rate stayed at the same level, hedgers needed time to adjust their positions. The open interest COT index declined from 50% to 42% meaning the market open interest is at its average level.

The large speculator and small trader COT indices are equal to 61% and 43%, respectively. Both categories of traders indicate this downtrend in the market is weakening. On the other hand, there is not a sign for the uptrend from the fundamental point of view. Currently, the situation is not the easiest one and requires traders to be both patient and careful.

Figure 3: EUR/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

The EUR/USD exchange rate consolidated the weekly support level at 1.3000 and the monthly Fibonacci 38.2. Considering only Friday, traders could observe high volume but positive delta of the volume value. Friday's decline is in the interest of traders, but there is no downside pressure. In addition, on Thursday there was a big increase with even larger volume and a positive delta of the volume.

Traders should closely follow the market on Monday and look inside the one- and four-hour time frames. All the three scenarios are highly possible: either we will observe a breakthrough of the weekly support at 1.3000 and a downtrend towards 1.27 or a breakthrough of the Fibonacci 38.2 and a correction towards 1.33 or a flat trend continuation.

Figure 4: EUR/USD daily candlesticks. History from Mar 2012 to Feb 2013

While the EUR/USD market is consolidating in a diapason from 1.3000 to 1.3150, the GBP/USD exchange rate continued decreasing and closed below 1.5000. According to the COT reports, traders indicate the British pound is significantly undervalued relatively to the USD since February 5! Such a reaction of traders is not surprising because at the end of January/beginning of February the GBP/USD exchange rate reached its half-year low. Currently, the hedger COT and WILLCO indices are equal to 100%. 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 COT index is equal to 100%. The market may switch the trend at any time.

Figure 5: GBP/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

According to the COT reports, the GBP/USD market may be undervalued, however there is a potential for the short-term speculative movements. In addition, traders overreacted because they have not seen the British pound below 1.57 for quite a long time. A number of daily support lines are situated around 1.5000 and at the end of the week, one was broken through: the exchange rate dropped below the daily support at 1.4950. The volume is not the largest but is quite high; what is more important, sellers were prevailing on Friday. It indicated that the downside impulse has power. The GBP/USD exchange rate may drop to 1.47 where a weekly Fibonacci level of 161.8 is situated.

Figure 6: GBP/USD daily candlesticks. History from Mar 2012 to Feb 2013

The last currency pair I would like to bring to your attention is the USD/CHF which, according to the COT reports published on Friday 10, is overvalued. After the exchange rate reached its half-year maximum at 0.9500, the hedger COT index increased to 100% (+26 percent points) and the WILLCO to 98% (+26 percent points). However, the open interest increased too: approximately by 16%! As a result, the open interest COT index is equal to 100% and it indicated the CHF/USD (not USD/CHF) is overheating. At the same time, small trader and large speculator COT indices support hedger behavior. All the three categories of traders indicate the USD/CHF to be overvalued (CHF/USD undervalued), but the open interest values raise concerns whether the uptrend finished on Friday.

Figure 7: CHF/USD futures and options data, the COT indicators. History from Jul 2012 to Jan 2013

On Friday the market has broken through the weekly resistance at 0.9500. It was supported by large volume and positive delta value. There is an upside pressure. Most probably, the market will continue growing towards the 0.96-0.97 where a daily resistance and monthly Fibonacci 50.0 are situated.

Figure 8: USD/CHF daily candlesticks. History from Mar 2012 to Feb 2013

The forecast wrap-up is the following:

· The USD index increase to 84.00 or consolidation.

· The EUR/USD rate decrease to 1.27-1.28, or correction to 1.33, or flat trend in within 1.30-1.32.

· The GBP/USD rate decline to 1.4700.

· The USD/CHF increase to 0.9600-0.9700.

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 EURUSD it is the EURUSD Futures traded on CME Group exchanges. The Delta Volume indicator shows a difference between volumes of orders based on ASK and BID prices.

Make your investment decisions only after a 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 provides the key information regarding the markets and presents his opinion about the markets taking into account his uniquely specified trading strategy.