Beware: Dollar’s Technical Condition Is Stretched, Look Out For Reversals

The US dollar advanced against most of the major currencies last week, with Brexit hopes on the upswing, helping sterling to be the only major currency to resist the pressure. If players were looking for an excuse to sell dollar the disappointing September jobs growth could have been it, but the bout of buying the rumor and selling the fact was quickly exhausted. Several of the currency pairs we review look stretched as do oil and the 10-year yields. The technical readings can make for treacherous conditions. Be on the lookout for reversals.  

Dollar Index  

The longest streak in five months (six consecutive sessions) ended with losses in the last two sessions of last week. This leg up began from around a three-month low in the third week of September with the Dollar Index near 93.80. It pushed through 96.10, which was above the upper Bollinger Band,before what appears to be the limited profit-taking kicked in. The MACD and Slow Stochastics are still moving higher. A break of the post-jobs data low near 95.50 would be disappointing, but additional support is seen in the 95.15-95.25 area. On the upside, the August 15 high near 97.00 is the next major objective.  

Euro

The euro’s latest push lower after the bull trap was sprung above $1.18 does not look to be over. The technical indicators are consistent with lower prices. There is a large option (1.3 billion euros) at $1.1450 that expires at the start of the new week. Reports in a local paper say the German economy ministry will cut this year’s GDP forecast to 1.8% from 2.3% and to 2% in 2019 in the coming day. If true, it does the euro no favors. However, it has already come a long way in a short period. It has fallen in nine of the past eleven sessions. We do not expect a push much below $1.1450 will be sustained quite yet. On the upside, it may take a move back above $1.1600 to turn the technical tide. 

Yen 

The dollar’s move against the yen was into its fourth consecutive week when the rally stalled near JPY114.50. Momentum traders may have gotten spooked, and the heavier equity tone provided no incentive to resist. The dollar fell back toward the week’s lows near JPY113.50 ahead of the weekend. The technical indicators are turning against the dollar. We suspect the risk is that the pullback is only about half complete and the dollar has potential toward JPY112.50. One implication of this is a significant correction to the euro-yen cross which appreciated by more than 6.5% between the middle of August and the end of September. It finished the week flirting with the uptrend line. The yen can outperform the euro by oneto two percent in the coming weeks,