Upside Break In Currencies Foiled By Cautious Fed And Stronger PMI

The dollar fell to new lows against the euro, sterling, the Australian dollar, and the Swedish krona last week. However, it was a head fake and the greenback quickly returned to its previous ranges. The combination of the July FOMC minutes that dampened expectations for new initiatives, such as yield curve control or an increase in asset purchases and disappointing preliminary August PMI readings tempered investor enthusiasm for risk. 

Since the lower end of the dollar's range was tested, the rule of alternation warns of the risk that the upper-end will be probed.  Just like the downside was frayed so can the upside. The resilience of the US PMI and the continued outperformance of US stocks compared with Europe undermine some of the arguments of the dollar bears.  Still, the US PMI contradicted the disappointing Empire and Philadelphia Fed manufacturing surveys, anecdotal reports suggesting the loss of the $600 federal unemployment insurance was already impact consumption, and some daily and weekly economic activity reports that also showed a loss of momentum. This is where market positioning can be a more salient factor.  The uncertainty may encourage a move to the sidelines, which means reducing exposures and for momentum and other short-term traders this means liquidating foreign currencies and buying back previously sold dollar positions.  

Dollar Index

The low for the year was recorded last week near 92.00.  Neither the MACD nor Slow Stochastic confirmed to new low, creating a bullish divergence. The upper end of the range comes in around 94.00, and closer to 94.30 is the (38.2%) retracement objective of the drop at began at the end of June.  A gain above there would target 95.00, with intermittent resistance near 94.50. The Dollar Index closed above its 20-day moving average (~93.20) for the first time since July 3.  


The euro recorded a two-year high a little above $1.1965 early last week preceding to shed two cents in the second-half of the week and ended an eight-week advance.  The roughly 0.5% net loss on the week leaves it virtually unchanged for the month.  Contrasting preliminary PMI reads, with Europe disappointing and the US surprising to the upside saw the euro post an outside down session ahead of the weekend. This leaves it vulnerable at the start of next week. The price action appears to have left a bearish shooting star candle. The momentum indicators also favor additional losses.  The lower end of the range is around $1.1700, and below there is a band of support from $1.1650 to $1.1680. 

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Read more by Marc on his site Marc to Market.

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