I think the near-term theme of US dollar support will carry into tonight's session. The US Dollar Index is showing support in the form a nice symmetrical pullback into the .786 retracement support at around 75.30. Though we don't actively follow or trade this index, it's a nice proxy to see how the US dollar is progressing on a very broad level. I believe a test of 75.30 will correspond with a test of 1.4850 resistance in EUR/USD. I have the .786 retracement of the 1.4946 to 1.4443 move falling in at 1.4838. What am I going to do with this? Nothing. What I am going to do is add to my EUR/JPY short if I see EUR/USD hold this level with weak international equity markets.

If you are wondering what the correlation is, allow me to explain. What do we know? First, we know the US dollar is facing support per the US Dollar Index. So if the US dollar does in fact hold this level, than the EUR/USD is headed lower and USD/JPY is headed higher. So now we have to figure out which currency, either the yen or the euro, will respond more to a stronger US dollar. Well, USD/JPY has a ton of resistance between 108-109, and EUR/USD has an easy 400 points to fall before 1.4450 support comes into play. So USD/JPY will likely meet much more resistance to the topside then EUR/USD will meet support on the downside. This will help my EUR/JPY short position.

Or, if the US dollar craters through 75.30, I would prefer EUR/USD to move higher, but not past 1.4950, and USD/JPY to much lower through the 107 trendline support towards the February low of 105.80. If EUR/USD is at 1.4900 while USD/JPY at 106.00, through simple multiplication this equates to EUR/JPY at 157.94.

I am short with stops above 159.40 for now. On the break of 158.50, I will add to my short and trail the stop lower targeting 156.00 in coming sessions.



Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

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