Since July we have seen the US dollar rally result in the Dollar Index rallying over 25% to its peak in mid-March. However since then there has been a period of choppy tradig as the market has been driven by the uncertainty surrounding a move towards a tightening of interest rates by the Federal Reserve. Data dependency was supposed to drive dollar strength once more. However, one factor was crucial to that move. The US economic data needed to continue to improve, or in the least remain fairly stable. However in the course of the past few weeks there has been a succession of weak data points and the dollar has come under considerable selling pressure. Has the dollar bull run come to an end?
The first piece of evidence to call upon is that the Dollar Index has completed a top pattern and has now broken its technical uptrend that has been in place since July. The sharp selling pressure this week has ensure the breakdown, however I would like to see a breach of the support at 93.25 to really confirm that the long term dollar bulls have lost control.
The top pattern completed on a move below 96.17 which then saw a pullback rally before the selling pressure has continued. The technical downside target is for at least 92.50. It would certainly seem as though there will be pressure on 93.25.
I see the 93.25 support on Dollar Index is now key. This equates to the $1.1530 high on EUR/USD. The euro accounts for around 57% of the Dollar Index (.DXY) and naturally theere will be similarities between the two charts. EUR/USD has completed a double bottom pattern on the move abvoe $1.1050 and this implies a move towards $1.1580 (ie. the equivalent of the 92.50 target on the Dollar Index). The euro also has a nearer term bull flag pattern that implies a target of $1.1700. So there are plenty of reasons to suggets that the euro has now entered into a near to medium term recovery run.
We have also got the strength of the rally in the price of oil to contend with. The price of WTI oil started to decline in late June and fell consistenetly until the dollw peaked in mid/late March. Since then, in a similar way to the euro, the WTI price has completed a base pattern (on a move above $54.25 to imply a rebound target of $65.00. This is a move that continues to play out.
These charts would suggets thta there could be more in this move against the dollar. The ADP employment data was disappointing yesterday and if it is anything to go by, the Non-farm Payrolls data tomorrow could also be weak. A weak payrolls number tomorrow could be another boost to EUR/USD and also WTI oil.
I am however inclined to say that this is just an unwinding of expectations that is playing out. The US economic data is unlikely to continue to deteriorate. This time last year the US was in the process of having Q1 GDP sharply downgraded during the second and third readings. However Q2 2014 marked the beginning of a significant recovery for the US economy which began to drive the dollar higher.
Although I do not believe that the Federal Reserve will be able to seriously think about hiking interest rates until at least two or maybe even three months of data shows an improvement (so as to no be seen as an anomoly) which could prevent a dollar rally from resuming in the near term. For example the ISM data needs to show a decent pick up (it was flat this month), but also it was interesting to see Labor Costs rising the highest since September 2006 yesterday. This suggests that it could be storing up inflation for further down the line, something that the Fed will be watching out for.
I see the current move against the dollar as part of a fluctuating few months for the greenback, as the data could be mixed before it begins to pick up. The weaker data keeps on flowing for now and Non-farm Payrolls could be a cataylst for a bit of a blowout tomorrow if the ADP employment is anything to go by. However once these targets on the dollar charts are hit there may be a view that this sell-off on the dollar has gone far enough. At some stage the re-adjustment of expectations with regards to the FOMC tightening will be complete. I still see the FOMC as looking to move towards tightening in 2015. That is why I am happy to back a EUR/USD rally for now, but am unwilling to bat against the dollar for too long.