On the back of the Bank of England’s Quarterly Inflation Report, yesterday we finally saw Cable breaking the shackles of a 7 month downtrend that had dragged sterling over 2200 pips lower from a peak of $1.7191 in July to a low of $1.4948. The rally of around 150 pips on the day helped to pull sterling to a 5 week high and open further upside. This improvement in the outlook of sterling looks to be part of a recovery in Cable, but could other major pairs take the cue for a rally. Are we about to see a dollar correction?
Just prior to the Non-farm Payrolls last week it had looked as though the dollar was on the brink of a correction. Several of the major currencies were close to important technical levels that would have triggered a retracement for the dollar (a least in the near term). Although the strong Non-farm Payrolls report scuppered the near term prospects, however, once more the dollar has dropped away and looks set for a near term correction.
A breach of an 8 week uptrend on the Dollar Index comes as the support of the 21 day moving average is creaking. It would appear that the move would still be merely a correction within the 7 month uptrend for the dollar, with the long term outlook remains solid for the grenback. However a near term correction on the dollar could easily be seen which would take the index back into the support band 91.5/93.2.
Triggered by the Bank of England, we have seen Cable form a base pattern that suggests upside towards $1.5485. However on the same morning we also had the Bank of Japan suggesting that additional monetary stimulus would be potentially “counterproductive”. Cue a bout of yen strength. Now, there has been no decisive change of outlook yet from that move and actually the dollar bulls are fighting back today as support at 118.30 has held firm. In fact, Dollar/Yen is now challenging upside resistance at 119.20 and if this is breached then this would be a significant obstacle overcome for the dollar bulls. The euro did well to follow sterling higher yesterday, but has struggled to maintain the momentum today and is still stuck firmly underneath the key near term resistance band $1.1500/$1.1530.
For the moment, it does not look as though the euro or the yen (the two large weighting components of the dollar index) are set to embark on significant rallies and this should be able to restrict any significant correction on the dollar.
If we look at the performance of the major currencies as measured against the Dollar Index (see below), since the beginning of February we can see that it is in fact the Kiwi that is the best performing major currency, with Sterling and the Canadian Loonie not far behind. This clearly reflects the fact that the oil price has made a significant recovery in the past couple of weeks (both the Kiwi and Loonie performances are positively correlated to oil). However, sterling has also been positive and could continue to remain supported as the market expectations of rate hikes have been drawn closer.
The technical analysis of the Dollar Index suggests that there is room for a minor correction in the coming days, but nothing too significant (maybe 1% to 2%) and perhaps this will be driven by a Cable rally. However in the context of the bigger picture the dollar remains king and any move would still be counter trend.