Consolidation in the Majors Opens the Door Higher

Welcome to the end of the second trading week of the new year. As expected and written about over the last few sessions, it looks like the market is finally finding its legs and starting to stabilise a little. Of course it’s still early doors, but the price action in the last 24/48 hours is starting to hold a clue and give assurances that punters are slowly finding their feet.

Moves overnight and more importantly daily closes on a few pairs suggest that we’re entering a period of consolidation, and predominantly USD based consolidation. All the white noise is slowly being washed out of the market and the likes of the EUR/USD, Cable and AUD/USD are not only confirming recent ranges but (based on the closes overnight) showing signs of upward tests and possible near-term breakouts.

News from the Asian session was thin at best and certainly in no way market moving as it were. US indices closed in small positive territory and while giving a positive lead to their Asian counterparts, this move was somewhat stifled. The S&P500 still has been unable to crack the upper bound of its recent and most obvious range at 1305, but the price action certainly looks constructive for the time being. Understandably currencies have put in a similar performance as noted above.

On the day we have CAD and US trade balances as well as UK PPI first thing this morning as well as a before the bell earnings report from JP Morgan in the States. I prefer to look at the market with a slight positive tinge for now and think that while today promises to be a quiet session for the most part, next week should be fairly constructive.

On the crosses, I believe that the EUR/USD still has legs higher especially after its performance yesterday and the move may stem from an unlikely catalyst, the EUR/GBP. This cross still has a lot more room for a consolatory bounce and with it, it should drag the EUR/USD. The talk of the impending short squeeze due to historic International Monetary Market shorts so far hasn’t materialised, but it’s worth bearing in mind where all those shorts were initiated and where the actual pain (stop loss) threshold lies. The truth is, that level should be above the 1.3000/50 area and only above there could we see further knee jerk reactions on position squaring. This of course means that we still have room to go up there before we either turn lower again or genuinely see a short term squeeze. So for the time being I’m bullish the EUR/USD (not to be confused with my overall view of the cross trading far lower into the end of Q1).

The Cable is also playing catch up and unlike the EUR/USD has far more room to the topside as ultimately the move lower was perhaps unfairly overdone. The line in the sand for a weekly close (to mark further positivity) now lies at around the 1.5450/80 level and if we’re able to clear this, then next week we simply revert to the 1.5430/1.5750 range traded for the last few weeks. This is my preferred scenario and for the time being GBP/CAD looks healthy as this scenario plays out.

The AUD/USD is undeniably set to test and quite likely break its triple top at 1.0380/1.0420 producing a rather ugly and brief squeeze, which once complete can be faded with full prejudice, stops needing to go in above the 1.0500/30 levels for another look at 1.0180 end perhaps even below. Not forgetting that the Reserve Bank Of Australia is slated for its first meeting of the year in the early stages of February and so far all indications are pointing if not to a cut in the overnight rate then certainly to a much softer rhetoric which in itself would be enough to put a dampener on the recent strength of the little battler.

And finally the USD/CAD... I like this pair higher and while I admit I expected dips to be deeper in recent days, the fact that they haven’t been reinforces the strength in this pair. Levels to look at are as they have been in recent sessions, 1.0130 and 1.0080 (if it even gets there), while the topside needs to clear 1.0250 for this move higher to be confirmed as legitimate.