FX.co ★ GBPUSD is going to reach 1.4700 but EURUSD will drop to 1.27

Most of the markets were quiet during the week: in the USDX, EURUSD and the USDCHF market consolidation were observed, while in the GBPUSD market traders observed an upward correction. Commitments of Traders revealed whether traders should change their expectations regarding the markets and correct their orders.

The USDX market

According to the Commitments of Traders report published on Friday 15st hedgers aggregated even lower net positions and believe USD is highly overvalued relatively to the major currencies: the hedger COT index declined to 0% (- 9 percent points). Comparing to the previous week, the market went up from 81.50 to 82.50 but by the end of the week market closed at 82.72 after testing the 83.00 level. The open interest slightly increased, as a result the COT index is equal to 100% for the 2nd week in a row indicating the usdx market is overheating. The Williams’ Commercial index (WILLCO) declined to 0% (-12 percent points). The index reached its lowest point confirming signals received from hedger net positions and open interest.

Now both the large speculator and small trader COT indices are equal to 100%. Less informed portfolio managers and the general public is going long to catch the last bits of the uptrend in the market. Note that this mass can also move the market quite far from its fundamental point. Summarizing, comparing to the previous week all five indicators show the USDX market is “highly overvalued”. However, traders should be ready for a flat trend or uptrend continuation because...

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

...the market continued varying close to the monthly Fibonacci 23.6 and the resistance level at 82.90. Market always can move up before getting a downtrend momentum. Therefore, traders should expect a market consolidation during the week, while there is a possibility for the growth till 84.00 where a monthly resistance is situated. Traders should be ready to go short but also should not be in a hurry and consider trends in the EURUSD and GBPUSD markets.

The EURUSD market

Not much has changed in traders' opinions regarding the EURUSD markets because the exchange rate was varying between the weekly support and the monthly Fibonacci 23.6 during the week. According to the Commitments of Traders reports, traders do not consider the EURUSD exchange rate to be overvalued anymore but they also do not say the market is undervalued. The hedger COT and the Williams’ Commercial indices are equal to 45% and 46%, respectively. Considering the fact, the EURUSD exchange rate stayed at the same level for quite a long time to let hedgers adjusting their positions. It is more probable that traders will observe a trend continuation in the market. However, the open interest COT index declined to 26% meaning more and more traders are exiting the market.

The large speculator and small trader COT indices are equal to 57% and 36%, respectively. Both categories of traders indicate it is too early to expect an uptrend in the market.

Figure 2: EURUSD futures and options data, the COT indicators. History: from Jul 2012 to Jan 2013

The EURUSD exchange rate continued consolidating between the weekly support level at 1.3000 and the monthly Fibonacci 38.2. However, today, on Monday the market rate opened below the weekly support at 1.3000. The market may return into the diapason but traders should be ready to enter the market at any time.

The most possible scenario in the market is a breakthrough of the weekly support at 1.3000 and a downtrend till 1.27 where another Fibonacci level and support levels are situated.

The GBPUSD market

While the EURUSD market waы consolidating in the range from 1.3000 to 1.3150, a correction was observed in the GBPUSD market: the exchange rate returned to 1.5100. According to the COT reports traders, the British pound is significantly undervalued relatively to the USD since 5th of February! The hedger COT and WILLCO indices are equal to 100% since then indicating market insiders expect the market to go up at any time. Both the large speculator and small trader COT indices are equal to 0%, which is also indicating the GBPUSD exchange rate is below its fundamentals. However, the open interest is booming in the market: it increased by roughly 20% in one week! The COT index is equal to 100%. The market may switch the trend at any time, however...

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

According to the COT reports, the GBPUSD market may be undervalued, however there is a potential for the short-term speculative movements because the growth has spotted after the market moved close to the resistance level at 1.5100. There is a probability that the uptrend observed during the last week is not a correction but a start of the uptrend, however a confirmation will be a breakthrough of the resistance level at 1.51. Otherwise, traders should not go long. The GBPUSD exchange rate still may drop to 1.47 where a weekly Fibonacci level of 161.8 is situated.

The USDCHF market (CHFUSD is observed in the COT report)

The last currency market I would like to bring your attention to is the USDCHF exchange rate market, which according to the Commitments of Traders reports published on Friday 15th is overvalued. Comparing to the previous week the only indicator which changed its value is the large speculator COT index. These traders were the slowest to adjust their positions according to the exchange rate level and market expectations. Currently, all three groups of traders indicate the market is USDCHF market is highly overvalued but the open interest is very high. As in the GBPUSD market, the open interest grew by roughly 20% during the week! It may indicate that there is a high interest in current trends in the markets. Thus, they may continue.

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

A market consolidation was observed during the week indicating the uptrend lost its power. However, the market may continue growing till the 0.96-0.97 where a daily resistance and a monthly Fibonacci 50.0 are situated. In addition, just before the market will switch to an opposite fundamental trend, a last bit of uptrend may be observed. Traders should be ready to go short in the USDCHF market but also consider possibility of increase till 0.97.

The forecast wrap-up is the following:

· The USD index increases till 84.00 or consolidates.

· The EURUSD rate decreases till 1.27-1.28.

· The GBPUSD rate declines till 1.4700 or consolidates close to 1.5100.

· The USDCHF increases till 0.9600-0.9700 or consolidates close to 0.94-0.95.

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.