Is The Dollar's Decline Set To Correct?

Dollar, Money, Cash Money, Business, Currency, Finances

The US election in early November was an inflection point. Stocks have rallied. The dollar has been sold. The rise in US yields has dragged up the yields in many other countries, especially in the dollar-bloc. European bonds have held in better, and peripheral European bonds have shined. Italy's 10-year benchmark yield fell to a new record-low ahead of the weekend.  

Before the political drama in Washington last week, the market had largely discounted the adverse developmentsThe move seemed to be getting stretched technically, and the sharp backing up of US rates in the past week may have also reached a near-term inflection point.

While our medium-term expectation for the dollar to resume its decline remains intact, we anticipate a near-term correction.  We look at the charts and momentum indicators to help quantify some price targets.  

Dollar Index

The lowest level since the spring of 2018 was recorded in the middle of last week (~89.20). The dollar recovered even though the data was disappointing; particularly, the contraction in the ISM services and the outright loss of 140k jobs last month. It tested the 20-day moving average (~90.15) after the employment report. The moving average has capped counter-trend rallies for nearly two months. The momentum indicators did not confirm the new lows.  The 90.65 is a reasonable initial target, but the 91.10 area is the real hurdle, and it is roughly the halfway mark of the leg lower since the election. On the downside, a break of 89.00 would give scope for another 1% decline. 

Euro

The euro peaked near $1.2350 amid the turmoil in Washington and recorded the low for the week just below $1.2215 ahead of the weekend. It briefly traded below the 20-day moving average (~$1.2230) for the first time in nearly two months. The MACD and Slow Stochastic peaked before Christmas.  Initial support is in the $1.2170-$1.2200 band. A break of that area could signal another cent or so near-term decline. The US-German 10-year spread was near 205 bp in late 2019 was halved in April 2020. Last week it rose to almost 165 bp, with the (61.8%) retracement just below 170 bp, which in this fractal world is also the (38.2%) retracement of the larger decline from November 2018 (~280 bp).  It is the widest since March 2020. The rise in US yields likely reflects both supply and inflation premium.  

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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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