Dollar rebounded strongly yesterday on further speculation that Fed is paving the way to exit from current stimulus programs. Fed said that it will scale back the emergency lending program and reduce the combined initiatives down from $450b to $100b by January and will evaluate whether to maintain the Term Auction Facility on a permanent basis and put out for public comment a range of possible structures for a permanent TAF. Fed Warsh also said in an article in WSJ that policy normalization will likely begin before it is obvious that it is necessary possibly with greater force than is customary hinting that Fed might be aggressive in policy reversals.
Dollar index extended the rebound as 77.07, just shy of 77.09 near term resistance, before retreating in Asia. Strength in greenback is accompanied by weakness in commodities which saw crude oil breached 66 level briefly before stabilizing while gold also weakened back to below 1000 level. The reversal in dollar is yet to be confirmed as 77.09 resistance in the dollar index is still intact, while EUR/USD and AUD/USD are still hold above near term support of 1.4611 and 0.8589 respectively. Nevertheless, the development in crude oil did indicate that it has topped out at 75.0 in medium term in August and we're anticipating deeper fall to take on 58.32 support level. Hence dollar's downside should be limited and we're anticipating some stronger rally going forward.
Technically, the development in dollar index is so far inline with out expectations as strong support was seen in 75.89 key support level. Whole decline from 89.62 might have completed the five wave decline after touching meeting 75.89, on bullish convergence conditions in daily MACD. A break above 77.09 resistance will affirm this case and turn focus to 78.93 resistance for confirmation. In the end, in the least bullish scenario, we're looking at at least a rebound to 80/81 level.
On the data front, New Zealand recorded larger than expected deficit of NZD -725M in August. Japan CSPI dropped -3.5% yoy in August, inline with consensus. Eurozone M3 growth is expected to slow further to 2.7% yoy in AUgust. US durable goods orders are expected to rise merely by 0.1% in August with ex transport orders climbed 0.8%. New Home sales is expected to rise slightly to 440k in August. U of Michigan consumer sentiment is expected to revise slightly up to 70.3 in September. Focus will also be on G20 announcement on any reference to the currency markets and coordinated exit strategies.
EUR/USD Daily Outlook
Daily Pivots: (S1) 1.4594; (P) 1.4699; (R1) 1.4769; More
EUR/USD drops to as low as 1.4614 before recovery mildly. As discussed before, a short term top is possibly at least formed at 1.4842, just a head of 1.4867 key resistance, on bearish divergence condition in 4 hours MACD. With 4 hours MACD turned negative, intraday bias is cautiously on the downside. Break of 1.4611 support will solidify this case and bring deeper decline to 1.4446 resistance turned support next. On the upside, while another rise cannot be ruled out, we'd continue to expect loss of upside momentum and reversal signal as EUR/USD approaches 1.4867 key resistance.
In the bigger picture, there is no change in the view that rise from 1.2456 is the third leg of the whole consolidation pattern that started at 1.2329. Such rally should be near to completion with current rise as the fifth wave in the five wave sequence from 1.2456. Upside should be limited by resistance zone of 61.8% retracement of 1.6039 to 1.2329 at 1.4622 and 1.4867 and finally bring reversal. On the downside, below 1.4177 support will be an important signal that EUR/USD has already topped out and break of 1.3747 support will be the confirmation. In such case, deeper decline should be seen that sends EUR/USD through 1.2329 low eventually.