In a moment I’m going to tell you why I reversed my long-standing opinion on the British Pound against the New Zealand dollar (GBPNZD).
But first, a market overview on what happened in forex last week so you see everything in context. You see, we’re at or near some key inflection points in several pairs worth watching.
Let’s start with the U.S. Dollar Index (USDI).
The dollar’s been in an uptrend for the last several weeks until we saw a key reversal the week prior.
That key reversal put the brakes on the recent USD bull market for now. In fact the USD suffered its largest drawdown in the past six months.
Here’s the most likely explanation: Fed Chair Powell’s remarks made the case for continued rate hikes, but he stopped short of dialing up any further hawkish rhetoric beyond the established status quo.
So the dollar dropped back into a range instead of continuing the uptrend … for now.
Accordingly, I expect an ensuing sideways, directionless market condition in the greenback for the next several weeks.
Meanwhile, the Euro against the dollar (EURUSD) has been locked at or near the support area for a huge 10 year descending triangle for some time.
This is a monthly chart so it’s going way back in time to give you the biggest possible picture.
And right now, EURUSD is at the point where it can break out (or down).
If it heads up, it will likely break recent highs. But if it sinks back below the neckline again, we’ll likely see parity between the Euro and the dollar again (i.e. 1.00).
In the meantime it will consolidate at the 1.15 area for the foreseeable future. Look for a break to either side, but remember this is a long term view on a monthly (not weekly) chart.
Now for the pound …
In recent weeks, we’ve seen significant weakening of the not-so-Great British pound (GBP) against most of its trading counterparts. Recent bear technical price patterns in GBPUSD, GBPNZD, GBPAUD and GBPCHF suggest the GBP bear trend is likely to gather steam into the fall.
First, here’s GBPUSD (the pound against the U.S. dollar).
A quick comparison with the Euro shows that GBP’s bounce off the lows is much more tepid than for EURUSD.
To support the bearish case, there was a double top earlier this year. And now a head and shoulders pattern with a somewhat weak right shoulder has formed. The neckline is at 1.30. GBPUSD is not a buy at this time.
Any strength in this pair should be shorted.
Now for the big one: GBPNZD (the pound against the New Zealand version of the dollar).
As you might know, for the past 18 months I’ve been very bullish on this pair thanks to the double bottom that’s formed, plus the subsequent rounding bottom and breach of the neckline.
That double bottom featured a lot of key reversals too. That made it especially bullish and tempting for some good trades. And in fact, GBPNZD moved over 3000 pips on the subsequent run. We made quite a lot on the long side last year.
We also made several hundred pips on it this year too.
However, based on recent price action, I believe GBPNZD is looking to turn lower.
Yes, even though NZD is itself very weak, GBPNZD has had a lot of problems getting through the upper boundary at the 1.95-2.00 level. It’s hit repeated resistance there time and again. The price action is starting to look heavy
And once the supporting trendline is taken out, significantly lower levels are likely.
In fact, any thrust below the 1.85 level should lead to a dramatic drop in GBPNZD. Place your shorts according.
We can see a graphic comparison of GBP weakness in this EURGBP chart.
For the first time in nearly a year, EURGBP closed above the resistance line at 0.90.
The bull run was launched with a double bottom back in 2015 – 2016 but has stagnated lately.
However, EURGBP has finally completed a rounding bottom. (See the earlier GBPNZD pair for what often happens once this pattern is confirmed.)
With the neckline breach, the resumption of the uptrend should commence and we’ll see higher highs in the foreseeable future here.
Another pair that’s looking interesting is USDCAD (the U.S. dollar against the Canadian dollar).
This pair appears to have topped out and USD is looking vulnerable to CAD strength.
The recent descending triangle confirms the two topping patterns that presented themselves earlier. Any breach below the triangle should open up a new trading range all the way down to the 2017 lows and possibly even lower.
Let’s move on to the stock market, starting with the proxy for the tech stocks: the NASDAQ100.
As we can see, the bull market is well intact. The market is at or near all time highs and looking as strong as ever.
While the key reversal from a few weeks back may contain prices at or near current levels, the worst that’s likely to happen is a breakdown to the longer term support line.
As for the S&P500, that too is looking very strong.
Like the NASDAQ100 it also closed at or near all time highs and the long term bull remains long and strong.
We’re not seeing quite the same result with the Dow Jones Industrials, though.
The DJIA (Dow 30) has risen over the last couple of weeks but is still well off the January highs despite that recent bullish trend.
This could be a warning sign of future weakness in the market. The Dow has some catching up to do to confirm that the entire market is firing on all cylinders. Ideally we’ll soon see new highs in the DJIA for the bull to continue without any second guessing.
And that concludes this week’s analysis. Short GBP, especially GBPUSD and even GBPNZD (my long-time long favorite but no more). Go long EURGBP and consider shorting USDCAD as well.
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