A possible top in the EUR to GBP and bottom in USD to CHF conversions may hearald a significant shift in the foreign exchange market place.
Recent trends in the EUR/GBP and USD/CHF exchange rates may be about to reverse suggest our latest technical forecasts.
Demark Indicators are a set of chart tools which are used by analysts to identify tops and bottoms in the underlying price trend.
TD Sequential is the most commonly used; it utilises the mathematical principle underpinning the ‘Fibonacci ratio’ to help determine the point at which trends have reached maximum extension.
Without wanting to go into too much detail about the actual mechanics of the tool, suffice to say that when you hear a technical analyst say they have observed a "Demark 13", or "13 count" or "TD 13", it is a sign that the trend is probably exhausted.
This is a rare occurrence, so when a recent technical analysis note, authored by Commerzbank’s Karen Jones identified two pairs with Demark ’13’ Counts - EUR/GBP and USD/CHF, it was a noteworthy occurrence, and one worth commenting on.
Euro to Pound Peak Could Represent a Turn in Trend
EUR/GBP hit its 13 count on April 7 at the 0.8116 highs. It has since pulled back down to its current trading level at 0.7982; Commerzbank’s Jones comments:
“We view the market as recently topped following a 13 count on the daily chart, complex divergence of the daily RSI and the failure ahead of 2008- 2016 resistance line, which is located at .8162.”
The combination of the 13 count and major multi-year resistance level just above the 0.8116 peak are compelling reasons to view the peak as a potential major turning point for the pair – probably signalling a reversal of, at the very least, the short-term trend from up to down.
Analysts at Lloyds Commercial Banking are even more aggressively bearish. They note a tough ceiling of resistance blocking upside between 0.80-82. They also predicted a correction back down to 0.75, which is 50% retracement of the whole up-trend from the 0.69 November lows.
For EUR/GBP, this indicates the possibility that the pound may start to make a substantial recovery - or that the euro will depreciate - or a combination of the two. It may simply be coincidental that the probable technical top in EUR/GBP coincides with the start of the EU referendum official campaign in the UK. Or it might be a warning that the ‘stay’ campaign will start to gain fresh momentum in the run up to the June vote.
But back to the charts. In her research note, Jones says she is already ‘short’, (ie selling) EUR/GBP, with an eventual target at 0.7685.
The pair has recovered on Thursday April 14, after four consecutive down days, could this be the start of a recovery though?
We have written elsewhere that there is indeed an argument to be made in favour of the euro's uptrend resuming.
Richard Perry of FX broker Hantec, thinks the euro will stay in control.
He cautions bulls not to get too excited about the recovery as it has met tough resistance at the neckline of a small head-and-shoulders topping pattern visible on the hourly chart, included below.
This is what is called a ‘return’ move, and it simply means a brief return to a strong support or resistance level before the pair continues on its way. In this case the pair is expected to rotate in coming days and resume its down-trend until the exchange rate has reached the minimum target for the head and shoulders pattern at 0.7860, using its height extrapolated downwards.
A break below the return moves lows at 0.7925 would provide the confirmation necessary for such a move lower.
13 Count on USD/CHF
The other pair with a 13 Demark count is USD/CHF. According to Commerzbank’s Jones, this is a signal the pair has finally rebounded from oversold lows:
“USD/CHF has rallied strongly higher following its doji charted on Tuesday. It finally reacted to its oversold RSI and TD perfected set up, we suspect that the market has based.”
Although likely to be tested initially at the, “February low at .9660 and previous downtrend at .9681 (which is now resistance),” she expects the trend to eventually break higher to a target, which is substantially higher, at the 200-day moving average at 0.9826.
A sign of a more benign risk environment?
It is interesting to note that taken together these two major reversal signals could also be indicating a major reversal in global risk sentiment.
The swiss Franc is a popular safe-haven currency, which means it gains in value when investors are fearful. Its recent appreciation to extremes versus the dollar reflects the worsening outlook for global growth, as well as growing fears that China is slowing-down.
However, the signal of the Demark 13 count combined with the fact the pair is at extreme oversold lows, potentially indicates risk sentiment may be reversing, to a brighter outlook.
The dollar is the complete opposite to the Swissie, as it declines during periods of market crisis since it reduces the probabilities that the Federal Reserve will raise interest rates. Higher interest rates are positive for a currency as they attract more foreign investment because of the higher expected returns.
Assuming the dollar is now set to rise versus the Swissie, that would indicate a corollary rise in global risk appetite and therefore an improvement in the global outlook.
With EUR/GBP the same is true but to a lesser extent. The pound tends to weaken during periods of crisis as it lessens the probability that the Bank of England will raise interest rates.
The euro rises during times of investor fear due to its low interest rates and liquidity, which makes it a popular funding currency amongst investors seeking riskier bets with a higher potential return. However, when a crisis looms, investors start panicking and pulling out of these investments. This leads to the rapid repatriation of euros and an appreciation in the exchange rate.
The major trend reversal analysed in EUR/GBP, therefore back-ups and reinforces the reversal in risk implied by bottoming noted in USD/CHF.