We may be seeing a paradigm shift in the forex market. Bad news in the U.S. is no longer translating into a broad risk trade.

In the past, bad news in the U.S. would lead to a ‘risk off’ trade where the JPY was the main beneficiary but the USD also rallied against EUR and the commodity bloc. Over the past three days we have seen risk aversion coming from China and bad news in the U.S. Instead of seeing EUR/USD strength, we are seeing weakness.

Remeber that currencies are relative. Over the past 8 months, the euro has slumped based on euro-centric worries. The thinking was that European economic growth would lag U.S. growth by a large margin.

The outlook hasn’t improved for Europe but it is now darkening for the U.S. and elsewhere. Relatively, that’s a good thing for the euro.

If this is a paradigm shift, it’s major. It’s would be reminiscent of the USD during the financial crisis. Initially, the USD was falling to record lows as it appeared the crisis was limited to just the U.S. housing market. Later, when it became clear that the U.S. housing crisis was going to send the worldwide economy into recession, the USD rallied. This wasn’t good news for the USD, rather, it was relatively good news.

We are not yet saying there has been a paradigm shift but we are on the lookout. The caveat is that we are at the start of a new month and new quarter. Trading patterns often get skewed by flows. We won’t get a real idea of what is happening until July 6, when the U.S. returns from holiday.

The pound sterling made another move higher on Tuesday as it reached as high as 1.4838 before settling a bit lower. It touched the highest since mid-May and continues a retracement phase in cable. There is now no major resistance on the hourly chart until the double-top at 1.5048.

From a fundamental perspective, we have claimant count data and retail sales data on Wednesday and Thursday but the market is entirely focused on the June 22 budget. In order to get the pound moving higher Chancellor of the Exchequer George Osborne will need to strike a balance between a credible plan to lower the deficit and something that doesn’t stifle the economy. It’s a tall task.

Technically, the daily chart clearly shows that we’re in a retracement phase but we have to point out that the RSI is beginning to look very overbought. We think the market will press into the 50.0%-61.8 % Fibonacci “box” but we are worried about the timing. If the market moves higher over the next few days it will leave the market in a severely overbought position ahead of the budget and that could lead to a big move lower if Osborne disappoints. If the news is relatively positive, there is still a great deal of resistance clustered around 1.50 and that should stall the market.

We are looking for any push above 1.49 in the days leading up to June 22 as an opportunity to establish short positions. Short-term traders, however, should look to enter into longs but cover them before the 22nd, when we’re expecting a big move.

We have seen some life out of the euro this week so let’s take some time to evaluate the long-term prospects of the European single currency.

We all know that the euro-dollar has been in a long-term downtrend. Since trading at a high of 1.5138 in December the euro plunged to a four-year low of 1.1877 just this past week. That’s a more than 3200 pip decline over six months – truly an amazing decline.

Almost all the money made trading the euro over that time has been on the short side. Rebounds have been shallow and short-lived. Many analysts have been preoccupied by calling the bottom and once again that’s where we are today.

Let’s have a look at the chart. We can see the long-term downtrend but just in the past week we have rallied about 200 pips. Can the rebound continue? Or is this another bounce to sell?

Technically, we can see that the downtrend is well-intact but there has been solid pop. There is no significant support until 1.1637 so much of the market is focused on that target.

Looking at the Bollinger Bands, they show that the euro has traced along the bottom for some time now but there have been periodic rebounds to the upper band. We see some scope for a rebound to the mid-point, at roughly 1.23 or even the upper band, which should trend down toward 1.2450.

On the other hand, it would be no surprise to see the euro continue falling. Many of the corrections have been very shallow and today’s price action suggests we could be heading lower again.

The moment has finally come, after 7 months of range trading from 1.02 to 1.08, USD/CAD has broken down.

The catalyst was a stronger than expected Canadian employment report. Canada added 20.9K jobs in February compared to the 15.5K expected and +43.0K prior. The unemployment rate fell to 8.2% from 8.3%, no change at 8.3% was expected

The best economists we know are cautioning that hiring was heavily skewed toward government jobs and Olympic jobs, so there’s a bit of caution on the fundamental side.

The technical side, however, looks like this:

You don’t need to be an experienced technical analyst to understand the implications of the fall below 1.0207. It’s bearish, very bearish. The target is 0.96 but we will take the 2008 low of 0.9744 as our target.

We are also reminded of how much we like trading USD/CAD on technicals. Some things work technically better than others. Gold is a source of endless frustration for technicians but USD/CAD is a dream.

Our favourite examples are the triple top at 1.30 last year and the 0.97 to 1.03 range trade the played out in a generally text book fashion.

Yesterday we told you about how the euro looked vulnerable against the pound sterling and it proptly fell 100 pips.

Today we are looking at the euro on another front, against the U.S. dollar. The key in this pair for the past six weeks has been the 200-day moving average and today we saw it break below that market — a bearish sign for sure.

The euro has recovered to close above the 200dma, so there is some chance that this was a false breakout, but overall, it’s not looking good for the 16-nation currency. The problems in Greece are haunting the euro, with both the removal of Greece and a bailout as abhorent solutions. It’s also something that is no going to go away. The second thing that is dragging on the euro is weak economic data. The ZEW survey on Tuesday was far below expectations and it seems like every piece of data from Europe is disappointing.

In short, the fundamental and technical outlook is poor.

This chart shows the only line that matters right now — the 200dma. We can see that it’s sitting right on the line after falling about 40 pips below it earlier. We expect that it will fall definitely below the line in the next day or two. The next test will be the Dec. 22 low of 1.4217. If that breaks, a fall to 1.40 is likely and a target as low as 1.3750 possible.

Taking a look at the U.S. dollar/Swiss franc chart, there is a huge breakdown followed by a clear double-bottom pattern.

The pair fell 250 pips on Friday but the hourly chart shows strong signs of a coming retracement. The measured target of the double-bottom is 1.0274, which is nearly 100 pips above the current level. A move to their would also fit nicely into the Fibonacci retracement ‘box’ between 1.0260 and 1.0290, which represent the 50% and 61.8% levels.

As we can see, the double-bottom is a textbook fundamental pattern and if this chart holds to form, we could see a solid rally.

Any move below 1.0132, however, would be a sell signal and even anything below 1.0150 would be a good stop for a cautious trader.

On the upside, we would favour a full retracement of the big drop if USD/CHF can clear 1.0290.

AUD/USD looks tired and Friday’s non-farm payrolls report could be just the thing to stomp out the fading rally.

We saw a 100 pip intraday reversal on Thursday and that has set up an inverted hammer pattern.

We also draw your attention to the slow Stochastic, which is deep into overbought territory with the signal line threatening to cross over.

By any measure, AUD/USD is overbought. We have seen a rise in 8 of the past 12 sessions and all the down days were negligible until Thursday.

The short-term chart also looks like it’s setting up for a big move.

We’re seeing a classic consolidation pattern after a sharp reversal. The range is very tight at the moment, with 0.9180 and 0.9160 as the parameters. Any break is a short-term ‘go with’ but on the top side we would take profits quickly and look for a level to be a better seller. On the bottom, we would hold on through Friday’s non-farm payrolls and look to hit a home run as AUD/USD falls back to 0.8750 or lower.

There is no longer any doubt. The eight-month uptrend in EUR/USD is over. The chart is broken.

The only question now is: how far will the euro fall?

What we see on the daily chart is that the euro had a strong, steady uptrend that was broken in early December and has been sliding since. Thursday showed a big drop but Friday showed some stabilization, generating a doji star formation that can sometimes indicate a reversal.

When we look at some associated indicators, they show that the euro is severely oversold. The daily Bollinger Bands (in blue and green) show the euro driving down the lower Bollinger. The slow stochasic (red and orange) is deeply in oversold and the RSI has broken down.

All these indicators tell us that there will be a rebound in the euro at some point but our experience also tells us that markets can remain oversold for long stretches at turning points in a market.

The target we have been eyeing through this entire trade is the 200-day moving average (red). It comes in at 1.4187 today, which is nearlywhere the lows from August and the psychological support at 1.42 comes in.

It will be very tempting to go long EUR/USD in the next day if we see these levels. In a deeply oversold market, such convergence of support is generally a great place to put orders and hope they get filled on a sharp drop in the market. If those support levels give way, we wouldn’t rule out a drop to 1.39 in the near term.

Confirmation of the rebound will be found on the hourly chart, where we can see a well-definted downtrend.

We can see that this trend has been tested at least 4 times. It should pose initial resistance to any rebound in this pair. If it’s breached in the near-term, expect the 38.2% Fibonacci retracement level at just below 1.46 to be the next target. Those looking to sell a rebound in EUR/USD will start piling in at that level.

Overall, this is an exciting chart that will continue to add volatility and intrigue to the forex market in the coming weeks. The euro is definitely in a severe retracement following the past 6 months of gains but it’s growing oversold and market participants need to be prepared for a bounce.

You can bet that the people at the Federal Reserve have been glued to thier Bloomberg terminals all day with one chart on their screens — USD/JPY.

Today’s fall in the pair is no doubt a frightful one. One day after the FOMC minutes revealed that the Fed regards the dollar decline so far as “orderly”, we’re seeing the first signs of a disorderly decline.

In short, things could get start to get ugly here.

One of the tenants of forex technical analysis is to look at intermarket dynamics. There are correlations; some strong, some weak. One of the better correlations of the past two years has been that when stocks risk, the U.S. dollar makes gains against the yen.

Today, with the S&P 500 up 5 points and near a one-year high, we are seeing the U.S. dollar getting crushed against the yen and everything else. Another tenant of technical analysis is that when correlations start to break down, something is changing. What is changing here? Could it be that we are seeing the beginning of a massive dollar sell-off? It’s starting to feel that way.

But before we get too ahead of ourselves, let’s keep an eye on the calendar. Thursday is U.S. Thanksgiving and that should sap trading volumes. Afterwards we get into a bearish seasonal period for U.S. stocks and any sustained decline should boost the U.S. dollar.

What we want to watch, more than anything, is the same chart they’re watching at the Fed.

USD/JPY four hour

We can see that critical support at 88.00 has broken. We wouldn’t be surprised to see a retest of that level before the weekend but the technical damage is done.

What’s truly scary, however, is not that we’ve broken the support on the four hour chart. It’s that we are very close to support on the long-term charts. The weekly support on the left side of this chart is a 14-year low. A break below here would open up the possibility of a test of the all-time low of 80.

Needless to say, this weekly chart shows that we’re already within a few pips of some very, very critical support.

For traders, remember that support levels like these are rarely broken on the first try. We may see a break and then a retest and overall volatility. Still, the implications don’t look good for the U.S. dollar if 87.12 can’t hold in USD/JPY.

What might happen in the event of a disorderly decline in the U.S. dollar? Here’s what the FOMC said in yesterday’s minutes: “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

Such a decline in the U.S. dollar has the potential to create a massive conundrum for the Fed. If inflation rises, they will need to raise interest rates. But can they raise interest rates with the housing and banking sectors so fragile? If they are forced to raise rates, what will that do for the recovery? If they don’t raise rates, what will it do for the dollar?

This is what the Fed is worried about right now. Watch dollar-yen closely and listen to what the Fed says next.

A failed attempt to break 138.50 established a long-term triple-top on EUR/JPY charts and has led to a substantial 300 pip pullback. This chart has been a easy one to trade for technical traders and given the historical volatility of the pair around tops, this move may still have some way to go.

Looking at the hourly chart, a pattern of sharp drops and retracements is evident. After the initial drop, there is a nearly perfect 38.2% Fibonacci retracement. The second leg down was followed by a nearly 50% bounce and third leg by only a 22% rebound. In the most-recent leg, we have already seen a 38.2% retracement.

If that correction can exceed 50% (135.61) then the hourly downtrend may be in jeopardy. In that case, look for some stronger consolidation around 136.22 – 136.33 as another cue to sell. If then downtrend continues, look to support at 134.87.