Euro And Dollar Index Targets Met, Now What?

10 and one 10 us dollar bill

The dollar set new highs for the year against the euro, yen, Swiss franc, the Swedish krona, Australian and New Zealand dollars, and Chinese yuan last week. There was some consolidation ahead of the weekend, but the divergence theme remains intact. Two developments next week may underscore it:  Biden's initial proposals for the large (~$3 trillion) infrastructure effort (Wednesday) and jobs report (Friday) that is expected to be particularly strong (600k+).  

It seems notable that the dollar remained bid even tho the US 10-year yield backed off around 15 bp from its high. Sentiment seems as bullish the dollar now as it was bearish at the end of last year. Yet, sentiment often tracks the price action and does not lead it. There also has been a significant position adjustment among the currency futures, which we will include in our technical outlook below.  

Our target for the euro ($1.1770) and Dollar Index (92.75) have been met, and the greenback is approached our JPY110 objective in the yen. We will identify new targets but reiterate that our medium to longer-term outlook for the dollar remains negative.The widening of the twin deficits will be its kryptonite when the divergence turns to convergence. Given the slowness of the vaccine rollout in Europe, we suspect that may be late Q2 or early Q3.  

Dollar Index

The Dollar Index moved above its 200-day moving average (~92.60) for the first time since last May. It has risen in eight of the past 11 sessions and is near the upper Bollinger Band (~92.93). The momentum indicators are still constructive, but the MACD is especially extended. The 93.20 area may offer an initial target, but the next important area is 94.00. It reached a high near 94.30 as the US polls were closing in early November. The peak in H2 20 was set in late September around 94.75. A move back below the 200-day moving average would disappoint, but it may take a break of 92.00 to give the bulls second thoughts.  

Euro

We suggested the euro put in a double high near $1.1990 earlier this month and the break of the neckline around $1.1880 projected to $1.1770. This was met as the euro was sold to almost $1.1760 last week. There was some respite ahead of the weekend, but the euro's upticks were weak and shallow. The $1.1800-area provided a cap, and the 200-day moving average is at $1.1870 and rising. A (38.2%) retracement of last week's drop comes in near $1.1835, and the halfway point is $1.1855. The bears may be lurking there. The lower Bollinger Band will start the new week near $1.1755. However, the down move does not appear exhausted, and the next important target is $1.16-$1.17. The net long euro non-commercial position (speculative) in the futures market snapped a five-week decline in the reporting period through March 23. However, the increase was not due to new longs being established; rather, shorts were covered. The bulls have liquidated their long euro exposure for four weeks running and by about 33k contracts to leave them still long 195.5k, the lowest since last July. Positions remain elevated and bottomed closer to 140k-150k in the last few years.  

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Read more by Marc on his site Marc to Market.

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