Forex Journal

Forecasting future Forex movements is a tricky business. A word of caution – the following pages consist of my personal views, charts and chart-points and any analysis mentioned hereafter has no claim as to being certain or truthful and the opinions raised are backed by my stomach as a Forex trader of many years. My scenarios will do no more than show one of many possible developments of major Forex rates in 2012.  Finally, I like to draw particular attention to the medium-term approach used, seeking large price movements over the course of the next six to twelve months. 

Much of my forecast will be based on weekly and daily charts.  In an attempt to give these views some macroeconomic backing, a brief look at economic expectations and politics for 2012 is in order.  2011 is ending rather badly for Europe.  Despite all of the meetings, elections and rescue fund increases, reality points to recession in 2012 and an ongoing struggle to keep investors calm.  Different break-up scenario for the euro will make the rounds and add seasoning to the ongoing mix of ups and downs.  No matter how we turn it, the euro should head lower against the U.S. dollar, but especially against Asian and commodity currencies. 

It is an election year for the U.S. dollar.  In the past, this has often resulted in supporting the dollar.  Economically, the U.S. will hardly fare much better than Europe – a key advantage may be the higher levels of solidarity within the states and the faster reaction time of U.S. politics.  Talk to devalue its currency against the Chinese yuan (CNY) will become louder.  Meanwhile the Japanese yen  (JPY) will be used as a proxy.  The U.S. and Europe have no choice but to accept Chinese currency policy, aimed at maintaining competiveness and growth.  A possible escape route will be a rise in inflation.

Chart 1 shows the Weekly EUR/USD market action. It has been a very volatile four years and the outlook points to more of the same.  Large whipsaw movements of 5 to 8 cents with a bias towards 1.15 or even 1.10.  The support area at 1.30/1.32 is a key level.  While it holds, we can see temporary rallies up to 1.36, 1.40 or even 1.43. 

Seeking opportunities to sell rallies supports the main view for EUR/USD to trade lower in 2012.  A break at 1.30 could be early and reach support near 1.25 or 1.20 as an alternative target.  As we have seen in 2011, corrections can come fast and furious, but 1.30 to 1.32 should remain a key area while the downside could extend to 1.15 or even lower in the later part of the year.

The British pound may initially profit from the growing distance to Euroland and outperform the euro in the first few months of the year.  Chart 2 shows that daily GBP/USD has immediate resistance at 1.59/1.60, this will only last if EUR/USD falls through 1.30 sooner rather than later. 

In the alternate event, 1.65 or even 1.70 could be seen in the first or second quarter.  Even if it takes several months to move lower, I prefer looking for short opportunities.  Key support levels are at 1.53 and 1.50.  A break through support has the potential to see cable fall to 1.30 and lower with intermediate stops at 1.43 and 1.37.  Chart 3 shows Weekly GBP/USD market action.

This is an excerpt from Jan 2012 issue of Forex Journal.