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2012 Major Currency Pairs Technical Overview

Last updated 1/4/2012 10:25 PM EST (GMT -5) 0 Comments - Add your comment

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Bradley W. Gareiss

Technical Analyst, GFT

As we look forward to 2012, it’s logical to take a look back at 2011. I tend to analyze the markets on a “swing” time frame that sometimes only consists of a week or two of data. Yet, it is important to occasionally take a look at the big picture and see if any new lessons can be learned. The beginning of a new year is arbitrary, and we could pick any other time to reflect on the previous year’s price action, but it makes sense to use the new year as a reminder to take a look back at the longer term implications of recent price action.

So what did we learn in 2011? At first glance, we see that six out of the seven major currencies will likely end 2011 near the level where they began 2011. This reality serves as a reminder that markets rarely move to extremes. While most analysts are likely to predict a big move up or a big move down for a given market, the correct call in 2011 for most major currency pairs was that there would be some ups and downs followed by an anticlimactic finish near where they began.

What does this mean for 2012? Will the majors move up, down, or stay sideways like 2011? The truth is that that no one can be exactly sure what will happen over the course of a full calendar year. If we can’t always predict what will happen over the next hour, it is a tall order to predict exactly where the market will end up in twelve months. But we can take a look at the price action from the past year and use it to help us determine possible significant tests that could take place be in 2012. 2011 demonstrated that trading takes more than getting in on an easily identifiable trend and coasting to easy profits. We need to identify the critical levels that will come into play as we attempt to navigate the markets.

Before we move on to our currency pairs, here are a few notes that may help readers understand the following charts:

- The time frame of the chart is listed in the upper-right corner. This time frame represents the length of time for each candle on the chart. For instance, a weekly chart means that each candle contains one week’s worth of data.

- Fibonacci retracement levels are used to identify potential levels of support and resistance. They should appear clearly marked. More information on Fibonacci is covered on GFT’s Fibonacci webinar. Sign up for this webinar at the GFT website.

- The grey and white vertical stripes represent one month’s worth of trading data.

Please attend GFT’s live market analysis if you are looking for specific trade ideas, greater detail on the tools that are used for this outlook, or any other questions answered. Live market analysis is free to GFT customers with a live account. It takes place Monday through Thursday at 7 pm (ET) and customers can register at the GFT website.

EUR/USD

2011 Recap

The EUR/USD had mixed results in 2011. The pair began the year by continuing a rally that began in June 2010. However, the euro peaked at the end of May 2011 and has been steadily declining since. The decline in the second half of the year has matched the rally in the beginning of the year. Therefore, the pair will likely close out 2011 near where it began.

What to watch for in 2012

The EUR/USD will enter 2012 in an uncertain state. A clear trend hasn’t really defined itself. There is a possible bearish trend line forming on the chart, but so far, there are only two points of contact. At least three points of solid contact are required to form a strong trend line. The good news is that we could test the trend line for the third time in early 2012. If the trend line has a successful third test, we would focus on watching for short opportunities to develop, specifically if they allowed us to enter near the trend line. The low at 1.3145 (point B) could be another significant test the EUR/USD faces in early 2012. If the pair drops below that level, the next test will be at 1.3046, which is 61.8% of XA. However, an even more intriguing test would occur if the pair dropped to 1.2532. The test would not only face 78.6%. There are harmonic levels that would line up with this level as well; most notably, the distance from A to B is equal to the distance of 61.8% of AB and 78.6% of XA. So while the EUR/USD looks a little uncertain now, we may see support or resistance early in 2012 that could help set a bias for the rest of the year.

GBP/USD

2011 Recap

Does this look familiar? If you just read the EUR/USD analysis, it should. The GBP/USD weekly chart looks almost identical to the EUR/USD. Therefore, everything that we said previously about the EUR/USD applies here. The biggest take away from this chart is that the U.S. dollar has been the driving force behind the price action for both the EUR/USD and GBP/USD over the past couple years. It is worth noting again that the GBP/USD will end 2011 near the spot where it began.

What to watch for in 2012

The GBP/USD is also at an uncertain place. It will be interesting to see which formation takes the lead. It is possible that we could have a successful third test at the bearish trend line. Or if the trend line breaks, it will be interesting to see if 61.8% of AB will continue to provide strong resistance. If the pair begins the year by dropping, the first critical test will be at 1.5271. 61.8% of XA (1.5189) is just below that test, so it is possible that they could work together to create strong support. 78.6% of XA (1.4765) be a critical level because there are also harmonic levels that would line up here; most notably, the distance from A to B is equal to the distance of 61.8% of AB and 78.6% of XA. So like the EUR/USD, we could determine which levels will guide the way early in 2012.

USD/JPY

2011 Recap

When it comes to the major currency pairs in 2011, the USD/JPY is definitely the one that is not like the others. This pair was defined by a few huge moves in 2011 with relatively little volatility between the surges. January and February were very quiet, but March saw a drop of 700 pips followed an even sharper 900-pip rally. After a very volatile March, the pair slowly slid down for the remainder of 2011. There were two brief spikes up, but otherwise, this pair was pretty boring as it descended. However, the last spike pushed the pair above the bearish trend line, so the downtrend could be on the verge of a reversal. The USD/JPY is now hovering just above 76.00, which was established as a key low during the March plunge.

What to watch for in 2012

2011 was not the best year to trade the USD/JPY, at least from a technical perspective. Three unexpected surges combined with a lack of volatility did not make for a great market to trade. So first off, let’s hope the pair shakes off this recent behavior and begins moving with more normal price action. Until the pair sees smoother trends that aren’t marred by intervention spikes, it will be tough to find solid opportunities. At the moment, the best bet for normal price action to resume would be a rally above 79.55. This would establish the possibility of a new uptrend and it would help quell fear of another unpredictable intervention. If the pair does break to 79.55, we will begin watching for bullish opportunities. If the pair drops back to the 76.00 area, we will probably stay away.

USD/CHF

2011 Recap

The USD/CHF began 2011 in the midst of a very strong downtrend. The downtrend continued to move below a bearish trend line until this past August. Until nearly reaching 0.7000 in August, the pair saw no significant rally. It can be unnerving when a currency pair sees such a sharp move down without any significant correction, because it is only a matter of time before a rally emerges. Usually, when a rally has been suppressed for such a long time, it has a tendency to explode. Clearly, this was the case for the USD/CHF in August and September. The pair finally dipped in October before rallying back up in November to form a potential double top as 2011 draws to a close.

What to Watch for in 2012

The USD/CHF is facing a critical test at the moment. The pair is possibly forming a double top that would help the pair resume its downtrend. The thought here is that the pair finally had a correction, but the downtrend is simply too strong to deny. If the pair breaks down to 0.8550, the move would help generate a strong bearish bias. If the pair rallies past the possible double top, however, it would become clear that the corrective rally is not over. If this potential rally broke above parity, a strong bullish bias could come into play. After considering those two scenarios, it is easy to see how the current test could become the key to which direction the USD/CHF will move throughout 2012.

USD/CAD

2011 Recap

The USD/CAD has been in a strong downtrend since March of 2009, which can be seen in the above chart. However, the pair began to rally in July of 2011 and actually rose well beyond where it began 2011. The USD/CAD will end 2011 near where it began due to a recent drop, but it still carries a sideways to bullish bias if we only look at the data from 2011. A strong bullish trend line has emerged during the recent rally. 78.6% of XA pushed the pair down to a third test, which has been successful at this point. This trend line is currently the strongest long-term trend line on any of the majors. This becomes even more interesting when we consider the USD did better against the CAD than any other major currency. So the question now becomes if the pair can continue its recent rally.

What to watch for in 2012

Like the USD/CHF, the USD/CAD is at a moment of truth. The bullish trend line suggests that the pair could continue to correct the long-term downtrend. If the pair breaks above point A (1.0657), it could really accelerate to the upside. However, if the trend line breaks, then point X (0.9406) could become the critical level. While point X isn’t the all-time low, it is close. A break there could put the all-time low (0.9056) in range. It becomes easy to see that the bullish trend line could be a direct catalyst to the overall direction this pair could take in 2012.

AUD/USD

2011 Recap

The AUD/USD Weekly Chart looks basically like the USD/CAD weekly chart, only reversed. This pair has been rallying sharply since October of 2008. However, 2011 had mixed results as the pair has fallen back to where it began the year. Despite the similarities to the USD/CAD, there are some differences. First, the USD has not pulled back quite as far versus the CAD. Second, the possible bearish trend line has not seen a successful third test. However, AUD/USD did have a similar retracement at 78.6% of XA, which suggests the AUD/USD may simply be lagging a little behind the USD/CAD. Otherwise, the story was uncertainty as this pair seemed unable to decide if it wanted to continue its uptrend while lacking any serious correction down.

What to watch for in 2012

The upcoming bearish trend line will be the early story in 2012. Will the trend line hold? If so, the trend line will have three solid tests and become our primary focus. If the trend line breaks, then the two highs at 1.0752 and 1.1080 will be the last lines of defense. If AUD/USD rallies above 1.1080, the bullish bias will be fully intact and we will watch for specific bullish opportunities to emerge. However, if the bearish trend line holds, we will turn our attention to point X (0.9387). A break-through that low will suggest 2012 could provide the major correction down for AUD/USD. An uncertain 2011 makes either of these possibilities a viable option, and the overall bias could be determined very early in the year.

NZD/USD

2011 Recap

The AUD/USD and NZD/USD are usually highly correlated, and at first glance, it appears that the recent uptrends match up nicely. However, the NZD/USD diverged in November of 2011. Whereas the AUD/USD saw strong support at 78.6% of XA, the NZD/USD broke down much lower. This break down on the NZD/USD breached the bullish trend line on the above weekly chart, although the pair quickly rallied back above the trend line. It is possible that 38.2% of XA helped push the pair back up. Meanwhile, this move down on the NZD/USD unexpectedly creates a different viewpoint than the AUD/USD. This is especially interesting because there are several examples of close correlation in the majors on a long-term basis. So what will happen to the NZD/USD in 2012?

What to Watch for in 2012

The key formation on the NZD/USD as we enter 2012 is still the bullish trend line. While the trend line is not perfect, it is still the most important formation. Trend lines can face breaches and still remain intact. Currently, this trend line is a perfect example of a brief breach and quick recovery. Therefore, we will watch for shorter term formations that will allow us to go long near the bullish trend line. If the pair rallies above point A (0.8842), that would indicate a strong bullish bias. Of course, the trend line could still break. If the trend line breaks, we will watch critical levels of support that are labeled on the chart as the Fibonacci retracement levels of XA (0.7333, 0.6867, 0.6401, 0.5738, and 0.4893).

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