Greenback’s Tone Sours, Sterling May Shine

The reversal of the US dollar’s gains half way through Draghi’s press conference has undermined the near-term technical tone. The risk is on the downside, at least in the first part of the week, ahead of the FOMC meeting.

The US Dollar Index posted an outside down session on March 10. It drove the five-day moving average through the 20-day average, and turned the RSI and MACDs. Follow through selling ahead of the weekend was limited, but a break of 96.00 suggests potential toward year low set on February 11 near 95.25. Below there, last October’s low near 93.80 comes into view. A move above 97.00 would help being repairing the technical damage.

Provided the euro holds above the $1.1040-$1.1060 area, it has potential toward $1.1300. That objective is the measuring target of the potential head and shoulder pattern the euro has traced prior to the ECB meeting. The euro’s initial sell-off may obscured the pattern for purists, after all the euro briefly, albeit marginally, fell through the head of the pattern (~$1.0825 on March 2). However, and admittedly it is subjective and discretionary, we want to look past it.

The euro met the 61.8% retracement of its decline since the February high near $1.1375. For the past year, with the one exception of last August 28, the euro has been capped in the $1.1450-$1.1475 area. A break of that area therefore could be significant. However, with the US two-year premium over Germany widening to multiyear highs, we simply do not believe the incentive structure can fuel a sustained euro advance.

The US premium over Japan is widening (two and 10-year tenors) as well. The more robust appetite for risk seen in rising equities, high yields bonds, commodities and emerging markets would seem to support the dollar against the yen. However, the dollar looks capped in the JPY114.50 area. It has not been above there in nearly a month. Aggressive traders may anticipate another run in the dollar can take out JPY114, which corresponds to the top of a possible triangle pattern. The RSI and MACDs are slowly rising. Support is offered by the JPY112.00-JPY112.25 band.