I am leaning more towards a bounce than any type of breakdown.
The US dollar initially dipped lower to kick off the Friday session against the Canadian dollar but then turned around to show signs of life again. By doing so, it looks as if the market is trying to hang on to the 1.25 handle, an area that has been important multiple times. This is the bottom of the overall range, so it is very interesting to see that we have bounced from here. By doing so, it will be interesting to see whether or not we can continue to go higher.
Keep in mind that the crude oil market is currently testing a major uptrend line, so if it breaks down that could be reason enough for this market to go higher given enough time. The 200-day EMA sits at the 1.2636 level, and it will attract a certain amount of attention. The market has been going back and forth for quite some time, so I do think that it is probably only a matter of time before we continue the pattern. However, that assumes that the US dollar strengthens in general.
Alternately, if we were to break down below the hammer from Wednesday, it could open up a big move to the downside, as it would be a major breakdown through the support. At this point, the market will more than likely open up a bigger move lower. This could be accompanied by oil rallying, but at this point, you can also make the argument that this pair completely ignored the oil market when it was bullish.
The 50-day EMA looks as if it is ready to break down below the 200-day EMA, forming the “death cross”, but it is coming from a very sideways neutral position, so I do not read as much into it. The market could very well bounce all the way to the 1.28 handle, which is the top of this overall consolidation. The market will continue to be very noisy, but it does look as if we are running out of downward momentum. Because of this, I am leaning more towards a bounce than any type of breakdown. Expect choppy behavior, but we have a couple of clear areas to pay attention to in this pair.