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12/03/2015: What needs to happen for this to be more than just a near term correction on the dollar?


This morning we have finally seen the US dollar pull back from its recent strong run. The Euro has now rebounded 85 pips (around 0.8%) whilst Cable has also bounced around 70 pips (0.5%) and gold is up almost $6. The big question is, whether this rally is the beginning of a big correction on the dollar, or is this just another chance to get back in?

dollar

The dollar has reversed across many charts today. However, for now I am seeing this as a correction. There is much more that needs to be done to suggest the reversal is something sustainable. As ever I am looking for MULTIPLE CONFIRMATION to give me the idea that a reversal can be backed. “The trend is your friend” for a reason. So far, the dollar remains in its strong recent trend and there is nothing that has really been achieved yet to suggest the dollar rally is over.

The other fact that concerns me for the longevity of this move is that there has been no fundamental newsflow this morning that has changed the outlook. Generally we have Eurozone sovereign yields still trading around record lows which is supportive of the status quo (of euro weakness). However, the interesting move in the bond markets has been seen in the US Treasury yields that have been correcting for the past few days. This is reflective of improved safe haven flows.

After days of selling pressure, the euro has embarked upon a technical rally today. However, as yet this is just corrective within a 7 day downtrend which currently comes in around $1.0690. The problem with the EUR/USD chart is that there is no real resistance until an old minor floor around $1.0820, whilst there is a lack of any real key lower highs until all the way back up at $1.0906. Technically you would not really be getting excited about a sustainable rally until at least $1.0820. The daily RSI is just unwinding from oversold.

Euro

Dollar/Yen is the chart that I have been most cautious about in recent days, ever since the “doji” candle on Tuesday signified uncertainty. There is a 2 week uptrend that come in around 120.75 at the moment, which is right in the middle of a 30 pip band of support 120.60/120.90. A loss of 120.60 would therefore be the trigger of several near term corrective signals, not least of all a small top pattern. Again, for now the dollar bulls are in control but it would not take much to signal a turnaround in outlook on this pair which I always view as a barometer for sentiment. (Treasury yields are falling and the yen is strengthening, at the same time that the VIX Volatility is rising – these are signals of safe haven preference).

yen

The gold chart has been a bit more reticent in its rally today. The weaker dollar is strong for gold but there has yet to be a break thoruhg of any resistance of lower highs to signify a turnaround in sentiment. The resistance at $1170.60 is the first line that needs to be crossed, whilst $1175.40 would be a confirmation of a near term rebound. I am also interested in the fact that the hourly momentum indicators are also just unwinding from oversold and seem to be rolling over again at levels that other rallies within the downtrend have failed. This means that we are still in bear market rally territory.

gold

 

Interesting also that US Retail Sales has just come out weaker. So will these levels now be tested? We shall see.


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