What a week! We saw a lot of action in the charts and most of it were on dollar pairs. Fed Reserve Chairman Ben Bernanke finally confirmed speculations that the central bank would soon start tapering its asset purchases. The FOMC meeting minutes also affirmed this when the report showed that there is a lot of discussion among FOMC members regarding the bank’s current ultra-loose monetary policy.
The prospect of the Fed dialing back on its easing measures then sparked demand for the dollar especially since the ECB is thinking about pumping in more liquidity into the economy. However, it’s noteworthy to mention that the euro was able to pare some of its losses when positive data started coming out of the euro zone.
Going forward into this week, I think that the outcome of economic data and their implications for monetary policy would dictate the fate of the major currencies. Positive data would most likely have a bullish effect as they could give central banks one more reason to take a step back from easing while disappointing figures could give them more reasons to ease even more.
I’m looking to jump in on a potential short trade on GBP/USD. As Big Pippin pointed out in his Daily Chart Art, I noticed that the pair is making lower highs and could soon pullback to test the 61.8% Fibonacci retracement level. I have to be careful though! Price broke resistance at the 100 SMA. If the 200 SMA doesn’t hold, I will consider this setup invalid.
Okay, I’m fundamentally-bearish for the pair. However, I cannot just turn the other cheek and completely ignore the fact that EUR/USD is making higher lows and is trading above the 100 and 200 SMAs. My game plan for the pair will depend after it tests the SMAs. If support holds, I’ll go long. If we see a strong break, I’ll short.