There was a decent volatility on Monday in the Forex market as the dollar gained over its major peers. Risk-off was driven by fears of the new Covid stain spreading amid vaccine administration. We are going to look at the technical analysis of the major FX pairs.
Recent developments in the market
A new variant of the virus has broken out in South Africa and spreading quickly following a similar scenario in the UK in the last days of December. The virus remains a major concern for the market despite vaccine hopes. The UK declared a fresh national lockdown starting on January 5. As a result, the market mood fell back on Monday thus forcing the stock market and risk-on FX to shed some gains. Also, the uncertainties around Georgia’s special election could add to risk-off as we look forward to the FOMC and employment reports on Wednesday and Friday respectively.
The safe-haven dollar, on the other hand, had a significant recovery although still rooted to the downside. From the look of things, the market should maintain this risk aversion in the short term as doubts could lead to profit-taking. However, the long term perspective suggests more decline for the dollar and bullish traction for the stock market in the larger part of the 20221 Q1. The technical analyses below make use of the Elliott wave theory.
DXY Elliott wave analysis
The DXY could give us a sound idea of what the forex majors could do.
The bearish trend started in March and evolving into an impulse wave pattern (intermediate degree). Wave (4) ended at 94.79 where wave (5) started. From 94.79, we started counting for the sub-waves of (5). By extension, wave (5) could hit 88 or even below thus suggesting that the dollar will decline further unless a massive surge above the channel happens. However, at the current level, as the chart above shows, the price seems to have completed sub-waves 1-3 of (5) at 89.40. Now, we can anticipate a wave 4 corrective rally toward 90.4-91. With the current risk-off, that will most likely happen. Thus, we could extend this expectation to the major currency pairs with a rising dollar expectation in the short-term.
EURUSD Elliott wave analysis
EURUSD is closing up a wedge/ending diagonal to complete the 3rd sub-wave of 5 around 1.2315. The currency pair is expected to be capped at that level before it starts a decline for the 4th sub-wave toward 1.209. In the long-term, the euro-dollar bullish run could extend toward 1.245-1.25 to complete wave 5. The 61.8% internal impulse wave Fibonacci projection level at 1.245 is an ideal target.
GBPUSD Elliott wave analysis
The Cable completed a wedge pattern at 1.3686 for wave (W) of an extended and complex bullish double zigzag pattern. Wave (X) is expected to attract bears toward 1.313 in the short term. Afterward, we might see the bull fight back for wave (Y) above 1.42.
USDJPY Elliott wave analysis
USDJPY price chart looks clear and interesting. An ending diagonal pattern at the base of a larger ending diagonal pattern. The current intraday dip could continue to 102.63 but the real deal lies upside. USDJPY is expected to start a very big surge toward 103.9 and 104.7 if the pattern doesn’t get violated with a decline below 102.
AUDUSD Elliott wave analysis
AUDUSD is closing up on 0.775 and perhaps 0.78. Meanwhile, the current surge should complete wave (3). From 0.699, we are counting a bullish impulse wave advancement. Wave (4) decline to 0.765-0.76 at least is expected to follow if the current surge is resisted at the roof of the upper diagonal boundary. A similar scenario is being printed on the NZDUSD chart.
USDCAD Elliott wave analysis
USDCAD is expected to decline further to 1.22 or even lower at 1.2. However, with the dollar expected to bounce higher, USDCAD could recover to 1.2933 resistance level. As the chart above shows, we have been counting a bearish intermediate impulse wave pattern. With wave (4) ending at 1.3423, wave (5) is in motion. If wave 3 is not getting extended, certainly wave 4 should continue to 1.2933 or slightly higher. However, a break above 1.3080 would invalidate the count we have above for wave 5. If this happens and followed by a hit of 1.34, we can assume wave (5) has ended at the most recent low.
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