US Economic data has been disappointing in recent weeks. This is helping to stoke the fire of significant rallies on the euro and sterling. The FOMC statement caused a short pause in the move (although the euro has continued on its merry way this morning). The big question is how far can this run go before it materially changes the long term view of the dollar bull run?
The FOMC has said much of the bad economic conditions seen during the last few months have been “transitory”. A series of negative impacts including bad weather (for a second year in a row), port strikes and lower oil prices which have caused a decline in investment have all added to weaker economic indicators.
ISM Manufacturing has fallen for 5 months in a row, Non-farm Payrolls fell last month to the lowest in over a year, whilst consumer indicators such as Retail Sales, Durable Goods and Consumer Confidence have all fallen away (around 70% of the US economy is driven by the consumer). This does not suggest the Fed will be moving on rates soon. Analysts have subsequently been busy pushing back on their expectations of a first rate hike, which only a few months ago was looking at June as a possible first month. According to the CME Group FedWatch analysis of Fed Funds futures, the probability of an October hike is now 44% and December is now 58% and the first meeting that is more likely than not.
With expectations changing, the dollar strength that has built up over the past few months has begun to go into reverse in recent weeks. As this weak data has come out, the euro and sterling have both been shooting higher. The euro has jumped over 700 pips in the past three weeks, whilst at yesterday’s peak sterling had rallied around 930 pips. In the context of what had been months of selling pressure on these currencies against the US dollar, these are profound and significant moves. The big question is how far can these moves go before a breakdown in the dollar bull run can be called.
According to the Dollar Index (which is 57% based on the euro and 12% based on sterling), the long term bull trend is now being directly challenged. There is a retreat back into the support band 93.25/94.5. I see that if this correction continues, the uptrend will be broken but I expect that a move below the support at 93.25 would be confirming the breakdown of the trend.
This support band on the Dollar Index would appear to be coinciding with the resistance band of $1.1260/$1.1530 on EUR/USD which was the February consolidation range. Therefore, by association, this would mean that the Dollar bulls would have confirmed the long term loss of control against the euro on a move above $1.1530. For now the MACD lines are only just getting to a position above neutral (which shows just how bearish the outlook on the euro had become technically. A move above $1.1530 would see the MACD lines bullish too. The final confirmation would be a move above the falling 144 day moving average (currently $1.1680).
The outlook on Cable has been stronger than on the euro for a while and the bounce far more pronounced. That is why the pair is much closer to its key resistance which comes in at $1.5550 that needs to be breached confirm the end of the long term bearish outlook on Cable.
Interestingly, today we are seeing sterling beginning to see a little selling pressure (the first time in 8 sessions). This is coming as the RSI has hit 70 which I see as an important crossroads as it could give an excuse for traders to lock in some profits.
These dollar charts are close to an incredibly important crossroads.