FX And Oil Week Ahead: Oily Goodness And Will The USD Finally Get Some Love?

| About: The United (USO)

Summary

WTI risk reward is tilted to the downside.

USD expected to be bullish against the EUR, AUD & CAD this week.

Potential hawkish Fed surprises could be seen at this week's FOMC.

Summary:

The two key events this past week were undoubtedly the OPEC meeting in Doha and the ECB meeting. The unintended surprise was that the Kuwaiti oil services workers strike did for the price of oil what the meeting could not do. Even more surprising was that oil remained resilient after the strike was resolved and even rose to test the $44 level into the Friday close following the drop in the Baker Hughes rig count. Whilst the short-term momentum in oil is definitely bullish, the risk reward for WTI remains to the downside after the most recent run.

The ECB threw out no surprises with no new policy action announced, though the mention of loan conditions in Europe improving sent the EUR/USD into an irrational spike to the 1.1400 level before the pair sold off aggressively thereafter to the downside. Whilst EUR/USD fundamentals remain bearish, improving European conditions could certainly limit EUR downside from here, and as we have mentioned in previous weeks, the 1.1090 support will likely be the level which the pair will need to break through to really restart downside momentum.

This week's big market moving events will undoubtedly be the US Q1 GDP number and FOMC meeting, where we think the risk of a rate hike is higher than what most participants are expecting given the recent extraordinary meeting called by the Fed and the improving economic data trends especially in the labour market. In our opinion, even if no rate hike is seen, we think that the Fed will likely issue a neutral to slightly hawkish statement to signal a likely June hike which in our view should boost the USD this week especially against the EUR, AUD & CAD.

Trading and Technical Strategy for the week ahead:

Instrument Fundamentals Short term bias (1-3 days) Medium term trend (1wk-3mths) Long term trend (>3mths)
EUR/USD Bearish Bearish Bearish bias being challenged Bearish
AUD/USD Bearish Bearish Bearish bias being challenged Bearish
USD/JPY Bullish Bearish bias being challenged Bearish Bullish bias being challenged
USD/CAD Bullish but weakening Bearish Bullish Bearish
WTI OIL Bearish but improving Bearish Bullish Bearish bias being challenged
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EUR/USD (FXE)

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EUR/USD finally began to come off in the Friday session in what looks like a bearish technical head and shoulders formation playing out. The target on this head and shoulders pattern is the 1.1050 level if the pattern plays out in full. With the ECB now out of the way, and Draghi continuing to keep his foot firmly on the easing peddle, we expect the EUR can now continue its move to the downside. However, improving conditions in the EUR may lead to the downside being limited for the time being, so going aggressively short at this moment may not be the smartest move.

Given the current oversold conditions in the EUR on the hourly and 4 hourly time frames, we think a retracement to the 1.1280/ 1.1300 level is likely in the early part of next week before more downside occurs in the EUR into and following the FOMC.

Trading strategy:

Last week was nothing short of a difficult week for both long and short positions with both sides whipsawed especially following the ECB meeting. For this week, we think any rally to the 1.1280/1.1300 level should be faded to play the bearish head and shoulders pattern. Any short position taken should have a stop loss at the 1.1402 level. We would be looking to cover shorts at the 1.1090/1.1110 level.

Key Levels
Support: 1.1160/ *1.1110/1.1090/ 1.1050 (H&S target)
Resistance: 1.1240/ 1.1280/ *1.1380/*1.1410/1.1460
*Level to consider buying at for support & selling at for resistance for intra-day trades
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USD/JPY (FXY)

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The USD/JPY rallied sharply during Friday's session after the BOJ discussed the possibility of negative interest rate loans, with the pair spiking higher to test the 112 resistance which was more than we had initially anticipated. Whilst it may be tempting to keep buying into the pair at this juncture, it is important to note that the pair is overbought on the daily and 4 hourly time frames which indicates a consolidation or downside move in the pair is imminent.

Trading strategy:

The strategy of going long the pair last week would have worked out pretty well, though we would not be comfortable using that same strategy this week given the current overbought technical conditions. Our current bias for the pair tilts to the downside for now, though we prefer not to go short the pair given the potential for surprises by the BOJ. The current downside momentum and bearish bias for the pair will only be invalidated when the 113.80 level to the upside is taken out.

Key Levels
Support: 110.50/ *109.40/ 108.70
Resistance: 112/ 112.80/ 113.80
*Level to consider buying at for support & selling at for resistance for intra-day trades
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AUD/USD (FXA)

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The AUD/USD finally moved lower into the weekend close with the pair potentially forming another bearish head and shoulders pattern that targets the 0.7500 level. Given the current technicals, we expect that the pair will find temporary support at 0.7670 before rebounding back toward the 0.7760 level before continuing the decline to the 0.7500 level. The alternative to this path is a break of the 0.7670 level that goes straight to the 0.7560 level.

Trading strategy:

We re-initiated a short position in the pair at the 0.7780 level, and plan to buy back the position at the 0.7670 level with the objective of selling again at the 0.7760 level with the aim of covering this position around the 0.7510 level. Any short position taken for the pair should have a stop loss at the 0.7860 level.

Key Levels
Support: *0.7670/ 0.7650/ *0.7560
Resistance: *0.7780/ *0.7850/ 0.7930
*Level to consider buying at for support & selling at for resistance for intra-day trades
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USD/CAD (FXC)

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The USD/CAD had shown initial signs of a recovery in the Friday session before the rebound in oil prices led the pair to sink back below the 1.2700 figure. The pair continues to trade in an extended wave 5 downtrend channel and should continue to remain supported at the bottom of the channel. Canadian economic data is likely to take a back seat for the pair, with WTI prices dictating the direction for the pair. We continue to hold a bullish bias for now given the oversold conditions in the pair on the daily and weekly time frames, and with the extended wave 5 structure looking complete. However, we prefer to stand aside until the initial signs of a bullish reversal are seen.

Trading strategy:

We think a strong move up to around the 1.2750/2800 level will be needed to confirm the bullish reversal in the pair has started. Once this happens, one can then look at buying opportunities on the pullback to play the upside in the pair with a stop at the most recent swing low. Till this initial move happens though, it is better to stand aside from trading the pair. For key resistance and support levels for the pair do visit our site and newsletter for daily updates.

Key Levels
Support: 1.2600/ *1.2560 (Very Key support)/ 1.2450
Resistance: 1.2800/ 1.2920/ 1.2980
*Level to consider buying at for support & selling at for resistance for intra-day trades
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WTI OIL (USO)

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*Note on our price chart: Before we dive into the WTI technical analysis, we have decided to use the WTI continuous futures price as a chart instead of the original spot price posted in our article. This price will match the nearest dated WTI Crude futures contract which will switch automatically once the contract settles, moving on to track the next nearest dated futures contract. We will also be only analyzing the technical aspect of the WTI price, given the fundamental aspect of WTI oil is well covered by many subject matter experts in the energy commodities section. At this time, the nearest dated futures contract being tracked by the above price chart is the May 2016 contract.

There was no agreement at the Doha meeting as expected, and the initial expectations for a continuation of the downside move in WTI oil following the resolution of the Kuwaiti oil services strike never materialized. We would love to say we made tons in the last week buying oil, but that is not the case, and we may have given up on our initial bullish expectations to the $46 level and higher too soon.

Given the current momentum in WTI, the potential target to the upside is the $47.15 level from initial measurements, which indicates more gains in the coming week. With the most recent moves and the invalidation of the head and shoulders pattern, we have decided to remove the bearish red alternative path for now as the likelihood of that path playing out has diminished greatly given the strength and structure of the current move up. Once an interim top or correction has started we will revisit the levels which WTI will likely settle at before making its next larger move higher.

Trading strategy:

Whilst it is tempting to join in the momentum trade to the upside for WTI, current overbought conditions on the weekly and daily time frame make this a risky trade. However, if you wish to trade the short-term move up on an intraday basis with levels you can establish buy or sell positions at, do visit our site and sign up for the newsletter for daily updates and potential entry levels.

We prefer to wait for the next decline in WTI to establish medium to longer term buys in USO and XLE. The main risk to our long expectations as stated previously would be a drastic downward revision in the demand picture, which we do not see happening at this time. From a technical perspective, our stops would be at the lows made in January this year when we take our long positions.

Key Levels
Support: 42.40/ 41/ 39.90
Resistance: 44.60/ *46/ *47.15
*Level to consider buying at for support & selling at for resistance for intra-day trades
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