The Morning After The Night Before

The initial panic over, but that doesn't rule out more panic. That depends on whether the market remembers what it did the night before, and there are signs there’s quite a mess to pick through. Let’s highlight some basic conflicts.

The EUR/USD and USD/CHF went bezerk. The GBP/USD retained its stiff upper lip and refused to jump on the bandwagon, but it did drag behind to a certain extent. Is that a problem? Well, yes… it either has to recycle back to 1.5750, or make another new low. The downside was a lot closer. If it follows the other two, and works its way higher with the EUR/USD and USD/CHF also extending Thursday’s moves, then it conflicts with the larger structure. Specifically on the Continentals I can see direct follow-through lower (Dollar-wise), which should reach the targets I raised on Thursday. However, it would be in a structure irrelevant to this wave.

Perhaps I can look at the EUR/JPY to see if there are any clues there. Basically I’m bearish for the cross (and for the USD/JPY), but it is in a position where it could see a minor new high above Thursday’s high and then reverse lower … or it could go directly lower. The next question is “what will drive it lower?” I do have a good idea of the eventual target in this segment of the decline, and it’s enough to drag the EUR/JPY lower as long as the EUR/USD is not too strong. Otherwise we’re more likely be talking about a flat correction in the cross.

In summary, while I began the analysis thinking that the EUR/USD and USD/CHF should follow-through (and it is possible), I do think we need follow that with extreme care as the alternative could be a drift higher in the Dollar before it drops down to the possible targets I envisaged on Thursday.

The AUD/USD caught me pretty much by surprise. I had expected a firmer follow-through higher on Thursday. It’s dramatic pullback from 0.9304 has developed in a corrective manner, but the larger unknown is whether it will just drift sideways in a range or plight its troth to a stronger rally…

Of all the pairs, the USD/JPY has a clearer structure and I think it is the better route to take.