Dollar Bears Tighten Their Grip

The consolidation/correction in the US dollar that we anticipated on technical grounds was brief and shallow. A series of developments seemed to play into the bears’ hands.The developments from the shift in how China sets the reference rate, the wariness of some to expand its Treasury holdings, to less super-long bond buying by the BOJ and a more hawkish twist in the record of last month’s ECB meeting all seemed to provide new grist to sell the greenback. The UK appears to have won over support from Spain and the Netherlands for softer terms for Brexit and this helps send sterling sharply ahead of the weekend after having fallen to two-week lows the previous day. 

Sentiment toward the dollar remains nearly uniformly bearish. In fact, we suspect the way the market responded to the news developments probably says more about psychology and sentiment then it does about the actual developments. That fact that even the comments from the Bundesbank President Weidmann that interest rate hikes were not imminent failed to spur much of a reaction in the euro.  

The Dollar Index slid below the 91.00 low set early September last year. A convincing break warns of potential toward 88.50. Another technical calculation suggests that the chart formation since September projects toward 90.00. The euro is stretched and below the lower Bollinger Band (~91.25). This and the Slow Stochastics suggests some near-term caution may be in order, but the RSI and MACDs warn that the downside remains the path of least resistance. 

The euro rose through last year’s high before the weekend. It was bid through $1.22 in light Friday afternoon activity in the US. The euro’s pullback in the first part of the week held $1.19, which was also the 20-day moving average. The euro finished well above the upper Bollinger Band (~$1.2130), and coupled with the extended positioning may favor near-term caution, but the momentum suggests that higher levels should be anticipated. We see potential for the euro to rise into the $1.25-$1.27 area from a technical perspective.