Dollar Bulls Bend, But Will They Break?

The unexpectedly poor September US jobs data weakened the greenback’s technical tone, as questions about the underlying strength of the world’s largest economy, and the implications for the Fed’s take-off, intensify. The economic data the US is scheduled to release in the week ahead are not of sufficient heft to alter the pessimism that was spurred, but not caused, by the jobs data. Recall that earlier in the week, the US reported it new flash reading on merchandise trade. The unexpectedly large deficit caused the Atlanta Fed’s GDPNow to halve its estimate for Q3 growth to 0.9%.

No fewer than five Fed officials will speak next week and the FOMC minutes from its September meeting will be released. The former will give an opportunity to both hawks and doves to provide their economic assessments in light of the recent economic developments. The latter will provide some color on 1) how close the decision was to defer lift-off; 2) how confident they were that rates could still go up this year; and 3) which particular global developments are especially worrisome for the conduct of monetary policy.

The dollar’s recovery after initially selling off on the data surprise mitigated some the technical damage that had been inflicted earlier. The Dollar Index held above the 61.8% retracement objective of the rally from the September 18 lows, which is found near 95.10. The trend line connecting the August 24 and September 18 low came in near 94.75 (corresponds to the lower Bollinger Band) before the weekend (and almost 95.20 at the end of next week). A break of that trendline could spur a move toward the critical 94.00 area. The RSI is pointing lower, and the MACDs are poised to turn lower. On the upside, a move back above 96.00 would lift the tone while the 96.50-96.70 area has to be retaken to put the bulls back in control. 

The euro was rose from the lower end of its range to the upper end by the US jobs data. It stalled at the upper end of its two-week range near $1.1330. This area corresponds to the downtrend line drawn off the August 24 spike high (~$1.1715) and the September 18 high (~$1.1460). A break of this trendline would likely signal a move toward $1.1400 initially. The $1.1475 area, however, key. A convincing break could spur a move to the August 24 high, if not a bit higher. The RSI has turned higher, and the MACDs are poised to do the same. On the downside, a loss of the $1.1180 neutralizes the technical condition.

Since late-August the dollar has been tracing out a large symmetrical triangle pattern against the yen. About three-quarters of the time, this pattern is a continuation pattern. In the current context, this means a downside break for the dollar. The other point that needs to be made is that this pattern is subject to false breaks. And that is precisely what has happened on the past two Friday’s. On September 25, the dollar broke to the upside on an intraday basis only to close back within the triangle pattern. This past Friday, the employment shock saw the dollar break to the downside only to recovery back within it. The parameters of the pattern begin the new week around JPY120.75 and JPY119.40. At the end of next week, they are close to JPY120.60 and JPY119.60.