Dollar Correction May Continue

The US dollar fell against all the major currencies except the Japanese yen in the week following the disappointing job growth in February. The Norwegian krone was the strongest of the majors, appreciating 2.8% against the dollar and nearly 2% against the euro amid speculation the central bank will be the first, and maybe only major central bank to hike rates this year. 

The Norges Bank is expected to hike its deposit rate to 1.00% from 0.75% due to the rise in price pressures. Underlying CPI, which excludes energy and adjusts for tax changes, rose 2.6% in February from 2.1% in January. As recently as the middle of 2018, it stood at 1.1%. Yet the case for a rate hike is not unequivocal. Consider than January industrial output fell 2.2% in the month, the third consecutive monthly decline. Norwegian industrial production fell in two months every quarter beginning Q4 17. Monthly GDP rose for the first time in three in January. 

One of the considerations behind our expectation that the US dollar was not going to break higher quite yet is that we anticipate data to confirm that the economy slowed sharply in Q1. We expect it to be largely a function of the government shutdown, bitter cold weather and the tightening of financial conditions at the end of 2018. We anticipated the soft patch ending before the end of Q1 and see growth picking up in Q2 and Q3. Nevertheless, the weakness in February's manufacturing output, reported before the weekend, was unexpected. The decline in the Empire State manufacturing survey may also be worrisome. Economists, unlike what has been discounted by the market, still expect a Fed hike this year.  A recent Reuters poll shows the anticipated move has been pushed into Q3 from Q2.

Dollar Index: 

Despite falling in five of the past six sessions, the Dollar Index still looks heavy from a technical perspective and losses toward late January low near 95.75 are reasonable.The MACDs and Slow Stochastics have turned lower. The flagging price action of the past two sessions is often associated with a continuation pattern. The five-day moving average is set to fall below the 20-day moving average in the coming days. Initial support is seen in the 96.15-96.30 area. Note that the high recorded in response to the ECB's doveishness matched last year's high in mid-December near 97.70. If it is a double top, it would not be confirmed until the neckline is violated and it is not seen until closer to 95.00.

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Read more by Marc on his site Marc to Market.

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