Upside Dollar Correction Not Complete

Within the context of our medium-term dollar bearish outlook, we had been anticipating a countertrend dollar bounce. It was to be fueled by short-covering as the adverse developments had been discounted, rate differentials were moving in the US favor, and the technical indicators were stretched. When the dollar traded higher after the disappointing ADP estimate and the events in Washington, and again on the headline miss with the December non-farm payrolls, that lent credence to our call.  However, it looked dicey last week as sterling, and the Canadian dollar made new highs since the Q2 18.  Yet, the greenback ended the week on a firm note, and those corrective pressures are likely to continue into next week.  

Dollar Index

Advances bookended last week. After rallying Monday, the Dollar Index chopped around before moving higher ahead of the weekend. We are working off the assumption that the leg lower than began with the election is over and is being corrected. The first target is 91.15 (38.2%) and then 91.75 (50%). The other (61.8%) retracement comes in closer to 92.35. The momentum indicators are moving higher. The note of caution is the proximity of the upper Bollinger Band, which will begin next week a little below 90.80. The 20-day moving average (~90.10) should now offer support.  

Euro

The euro's technical tone has deteriorated. It peaked on January 6 near $1.2350 and, at the end of last week, fell to almost $1.2080, the lowest level since December 10. Last month's low was around $1.2040. The five-day moving average crossed below the 20-day moving average last week for the first time since a couple of days after the US election. The $1.2065 area corresponds to a (38.2%) retracement of the gains since then, and the $1.1975 area is the halfway point. The (61.8%) retracement is about $1.19. The MACD and Slow Stochastic are falling hard and approaching overextended territory. The euro finished just inside the lower Bollinger Band (~$1.2100). We suspect the euro will bottom around the ECB meeting and when the market turns its attention to the FOMC meeting the following week.  

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Read more by Marc on his site Marc to Market.

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