Dollar Correction At Hand Or Just End-Of-Month Adjustment?

The key question facing the foreign exchange participants is whether the dollar's bounce into the end of May is the beginning of a more sustained correction after falling for two months or simply a pause in the selling pressure.  As we have noted before, short-term trend changes are common around the end of months and the US employment report, typically the first Friday of the new month. 

two 5 U.S. dollar bankotes

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Our review of several dollar pairs' technical condition suggests a good chance that the greenback's recovery carries into early June activity even though its initial gains ahead of the weekend were quickly pared. Without stronger interest rate support, it is difficult to see a significant near-term recovery.  Here we put more weight on the December 2022 Eurodollar futures for Fed expectations than the 10-year yield, where the 20- and 50-day moving averages of the implied rate have converged around a little above 1.60% compared with a peak of around 1.77% at the end of March.  The Eurodollar futures appear to be discounting a rate hike at the end of next year.  

Dollar Index:  A small bottoming pattern appeared to have been carved out, but the Dollar Index was greeted by a wall of sellers after it popped above the 20-day moving average (~90.30) for the first time in a couple of weeks.  If a correction has begun, the measuring objective of the bottoming formation and the (38.2%) retracement objective of the slide since the end of March (from almost 93.50) comes in near 91.00.  Additional gains meet stronger resistance in the 91.50-91.70 area that holds the 200-day moving average and the next retracement objective (50%).  The MACD and Slow Stochastic have turned up from over-extended territory (USD).  

Euro:  The euro's advance, which began from almost $1.1700 at the end of March, stalled in the $1.2245-$1.2265 band.  ECB doves push against arguments in favor of reducing bond purchases. Month-end adjustments saw the euro retreat to around $1.2135 before the weekend before quickly snapping back to the $1.22 area.  The first important technical test is seen at around $1.2050, the low from mid-May and the (38.2%) retracement objective of the rally from that March low.  A convincing break could spark a test on the $1.1975-$1.2000 area, where the (50%) retracement and 200-day moving averages are found.  The MACD is turning down from the highs for the year.  However, the Slow Stochastic did not confirm the new high in prices and is curled lower, leaving a bearish divergence in its wake (FXE).  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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