This Monday one should expect moderate exchange rate volatility because many traders based in the United States are away from their trading desks honoring the Martin Luther King jr holiday. That said, I think the US dollar remains oversold and I expect stocks, commodities and higher yielding currencies to come under heavy selling pressure over the next few weeks.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UGNGRr

The US dollar starts the week mostly lower in light holiday trade, but the USDCHF pattern suggests that the greenback may soon accelerate to the upside.

If the rally from 9916 is in 5 waves (5th wave is truncated), then the decline from 10507 is a 2nd wave that is probably complete at the 61.8% retracement.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UKUJId

Last week, EURGBP broke below a rising trendline connecting the 10/2008, 8/2009, and 1/2010 lows, and today, the pair dropped below the 200 SMA at 0.8843, signaling potential for further declines. The next key levels of support include 0.8715, 0.8700, and 0.8650. Given the proximity of the support levels, I’m looking at this as a shorter-term trade from 0.8817, with a stop at 0.8880.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UNnyrD

The British Pound is currently showing signs of failure at the confluence of especially important resistance, as the 1.6280-1.6400 region represents a combination of 50 and 100-day Simple moving averages, falling trendline resistance, and the 50.0% Fibonacci retracement of the November-December decline. A failure here opens up a big move to the downside, so keep an eye out for a weekly close below key resistance line for a potential trading opportunity.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UQarGm

The start to this new weeks is relatively quiet. With most of the liquidity from the US drained for a banking holiday, there is limited effort being made to define a new trend for underlying risk appetite or individual currencies. However, this is a temporary lull in activity; and it doesn’t necessarily break from the staid conditions that we have established throughout the past month. In fact, the break in volatility today could actually work in the favor of positions set up on the basis of congestion. Looking at Friday’s activity, a strong move in favor of risk aversion brought more than a few critical crosses to notable technical extremes; and an anchor on activity today may actually prevent a dramatic change in bearing and instead establish another swing within congestion.

Heading into this week, I have a position that is founded on market stability (and the prevention of a new wave of risk aversion) as well as one that is established around a possible breakout (and looks for a reversal in the build up in sentiment throughout 2009). Friday’s surge in the US dollar brought EURUSD to bottom of the rising trend channel that has developed since through the middle of December. What’s more, a 200-day SMA is establishing a floor not far below the aforementioned floor. My stop however only covers the rising trend and looks for a first target around 1.4450. As an offsetting potential (with much more potential) is the NZDUSD short I established also at the end of last week. A consistent rising trend was broken on Thursday and I took a short on the potential that the period of stabilization could develop into a true reversal with time. Today’s freeze on volatility works against this position (which would potentially point to a much larger reversal in risk appetite). With an entry of 0.74, stop set just above 0.7450 and a first target looking down around 0.71, the risk/reward on this setup is attractive enough to position against a medium-term trend (bullish wave) and the general market’s penchant for risk.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UUZLmq

I initially sold EURUSD at 1.4881. Prices found near-term support above the 1.42 level and bounced to re-test support-turned-resistance at 1.4515, with the up move guided by a minor rising channel. Last week, prices moved sharply lower to find near-term support the bottom of this channel (now at 1.4354) , with another upswing possible before bearish momentum resumes. Still, these moves look corrective in the context of a larger downtrend and I will remain short, retaining a stop-loss at the break-even mark (1.4881) as well as the revised soft target at 1.4143.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UWskfR

Following up with the EUR/GBP short trade from the previous week, the pair tumbled lower for the fifth day and slipped to a fresh monthly low of 0.8781, which exceeded my target at 0.8850, and the exchange rate may continue to push lower over the week as it maintains the downward trend from October. However, as the RSI approaches oversold territory, we may see a corrective retracement as the euro-pound breaks out of the descending triangle/wedge formation,  and as a result, I will wait for further confirmation before attempting to short the pair again.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1Ub5L73

Lightened US holiday trade and quiet economic calendar should keep things quiet on Monday.

Read more: Forex Analysis | Currency Trading Picks http://www.dailyfx.com/analyst_picks/#ixzz0d1UdnBGe