With some key moves in forex markets in recent weeks, the outlook for the US dollar is under increasing pressure. The prospects of a rate hike seem to be dwindling and markets are moving to price this in. Looking at the longer term outlook on the euro and the yen reveals that there are some key technical levels against the dollar being tested. What are the key trigger levels to watch for on the key EUR/USD and USD/JPY markets?
I have returned from my short break to find the markets certainly did not wait for me. There have been some significant moves. However, sometimes it is good to look at the charts with fresh eyes and occasionally taking a step back to assess the broader trends that are playing out can help to improve clarity.
Since the FOMC opted to sit on its hands in the September meeting the US economic data has not improved and if anything is deteriorating. The disappointment of the Non-farm Payrolls report with the lack of earnings growth has induced a move against the dollar. However not the signs are that the consumer in the US is failing to pick up as Retail Sales once again missed expectations. This has induced an acceleration of US dollar weakness which has impacted on several of the dollar based charts. Add in the mixed messages that individual FOMC members are giving and it is difficult to see how a rate hike may be able to take place at all this year. Although my base case scenario for a rate hike has all along been December, but the evidence against it is beginning to stack up.
With Treasury yields falling sharply, the US trade weighted dollar has also come under pressure. Now we are seeing key levels tested on major dollar forex pairs, whilst gold has made a major break. Two crucial charts of Euro/Dollar and Dollar/Yen are at key turning points.
On EUR/USD I have been talking for several months about this range that has been in place. From ranging above $1.0810 it would appear that a new floor at $1.1100 has formed now. The rally has now seen a two day intraday move close to $1.1500 which is above what I previously saw as the upper bounds of the range at $1.1465. This now becomes very important as a sustain move higher to close for a second day above $1.1465 would re-open the $1.1710 which would be the key medium term move. If this were to be seen then the bulls would be in control. They would have not only left higher lows but also begin to form a look of higher highs too – the definition of an uptrend channel. However the weekly chart also looks as though it coule be a large base pattern. The weekly momentum indicators are not entirely bullish but there is definite improvement now.
This could very easily begin to be seen if the market has to price in a weaker dollar driven by the Fed putting off a rate hike into the new year. The only real caveat to this could be that the ECB begins to jawbone the euro lower. This has already begun to be seen, with Ewald Nowotny today noting that an additional set of instruments (ie. further easssing measures) were needed becuase the ECB was failing in its task of hitting the 2% inflation target. Perhaps there will be more dovish rhetoric from the ECB in the coming weeks but it remains to be seen if it can derail the current euro rally.
Dollar/Yen is in a similar boat really as the dollar is being re-priced against the backdrop of massive quantitative easing from a major pair. Governor Kuroda of the BoJ did not seem to suggest earlier this week in an interview on CNBC that there would be the need at this stage for further easing as the temporary deflationary impact of the weakness in energy prices feeds through. Subsequently, Dollar/Yen has dipped sharply in recent days as the dollar has suffered. The key medium term support band is between 118.30/118.50. However there has been no jawboning from the BoJ yet today (unlike Nowotny from the ECB) and the support band is failing currently. A close below would re-open the August low at 116.45 which is the equivalent of $1.1710 on the euro.
This means that Dolla/Yen could be ready to test the absolutely crucial support of 115.55 which has been a massive floor technically. If this level were to break then it would surely signal the increased potential of continued weakness on the dollar. The big concern though is the consistent deterioration in the weekly momenutm. This all suggests pressure is mounting on the key support level now.