An Extended Pause in the Rally?

USD, CNH, US Dollar, Chinese Yuan, USD/CNH – Technical Outlook:

• USD/CNH has struggled to break above major resistance
• There is a growing possibility of an extended pause in USD/CNH’s rally
• What is the outlook and what are the key levels to watch?

USD/CNH SHORT-TERM TECHNICAL FORECAST – NEUTRAL

The sharp fall in USD/CNH on Friday suggests that the Chinese Yuan’s (CNH) seven-month slide against the US Dollar is running out of steam, at least in the short term.

In the past two weeks, each time USD/CNH has risen above 7.35, it was sold off quite quickly — and sharply on two occasions (on Friday and on October 26). The peak at 7.35 marks major resistance, near the 2019 and 2020 highs at 7.1965, and coinciding with the upper edge of a slightly upward-sloping channel from 2018. This follows a negative divergence (rising price associated with stalling or weakening momentum) on the monthly, weekly, and daily charts indicating that the seven-month rally is showing signs of fatigue (see chart).

USD/CNH Monthly Chart

Chart Created Using TradingView

The retreat has brought USD/CNH toward a quite-strong cushion at the October 27 low of 7.17, near the 200-period moving average on the 240-minute charts. This support is strong and may not be broken so easily – the pair could consolidate a bit above the floor and below the mid-point of a slightly downward-sloping channel from the end of October (now at about 7.25).

USD/CNH 240-minutes Chart

Chart Created Using TradingView

Importantly, the sharp slide on October 26 and last Friday is not only a sign that USD/CNH is attempting to make a top at 7.35 for now, but also that bids can quickly evaporate once sellers gain the upper hand. Hence, the tide could be temporarily shifting in favor of bears. Any break below 7.17 would trigger a double top (the October and the early-November highs), opening the way toward the early-October low of 7.01 (see chart). This floor could be tough to crack as the trend and momentum on the monthly and weekly charts is up, notwithstanding the recent cooldown in momentum associated with the minor retreat in USD/CNH recently.

— Written by Manish Jaradi, Strategist for DailyFX.com