After making a new 2009 low against most major currencies last week, dollar struck a strong comeback on the back of upside surprise in employment report in US and closed the week higher. While the employment markets were still weak, the non-farm payroll report did show significant improvements over the last few months, considering that the -247k job loss in July was one-third of that peak of -741k recorded in Jan. Another surprise was the drop in unemployment rate which was down from 9.5% to 9.4%. While the economists are viewing that as a temporary dip and unemployment rate is still generally expected to rise towards the end of the year, the expectation has now shift to an earlier and lower peak.
Dollar has responded positively in a broad sense to a piece of positive data finally, arguing that traders are possibly turning back to fundamentals. In particular, consider that dollar was initially sold off after NFP on risk appetite trades but those weakness was quickly overshadowed by massive dollar buying together with surge in bond yields. Markets are continuing to reinforce the expectation that Fed will begin to remove the ultra-loose monetary policy sooner than earlier expected. Indeed, Fed fund futures are pricing in over 60% chance that Fed will raise rate from the current 0-0.25% range by January meeting, up more than 10% chance from a month ago.
The question in everyone's mind now is whether the dollar has bottomed? While the rebound last Friday was strong, there is no clear confirmation of reversal yet. Note that dollar's strength was seen mainly against yen and European currencies. The recovery against Canadian dollar and Australian dollar was mild while there wasn't much strength seen against New Zealand dollar indeed. Also, note that if the notion of traders turning back to US fundamentals is correct, we'd continue to see the greenback correlate positively with stocks, like what it did on Friday. In other words, strong data from US will boost both stocks and the greenback. In turn, strength is stocks will lift commodities as well as commodity currencies. However, strength in greenback will likely pressure commodities. So, in case of strong US data, European currencies will likely be pressured. But the fate of commodity currencies and dollar in generally, will depend on the developments in commodity markets, including gold and crude oil. But in any case, yen will be pressured by improvements in investor sentiments.
Two other main events last week was BoE and ECB meetings. The Bank of England decided to keep interest rate unchanged at 0.5% but to extend the asset purchase program by 50B pounds to 175B pound. This was done as recession has been deeper than expected and after assessing the new set of economic forecasts, the existing stimulus plans and generation-low interest rate are not sufficient to overcome deflation. More in BOE Extends The Asset Purchase Program To 175B Pound
As anticipated, ECB kept its main refinancing rate unchanged at 1% in August. Moreover, there's nothing new in the press conference that we could get regarding economic outlook, monetary policies or exit strategies. More in ECB Meeting: Non-eventful As Expected
Technically, dollar index did draw strong support from mentioned 75.89/77.67 support zone and rebounded strongly last week. Bullish convergence condition in daily RSI argues that 77.43 might be a short term bottom at least. But there is no confirmation yet. Focus will be on 79.66 resistance initially this week and break there will solidify the case that dollar has already bottomed out and turn focus to 80.89/81.47 resistance zone for confirmation.
Also, note that firstly, the decline from 89.62 is displaying a five wave structure and break of 79.66 resistance will argue that such five wave sequence has completed already and bring sizeable rebound. Secondly, the fall from 89.62 is indeed viewed as the third (and also the last) leg of whole consolidation pattern that started at 88.46. So completion of the fall from 89.62 will also indicates completion of such consolidation from 88.46 and hence, will likely pave the wave for resumption of medium term rally from 70.70 that eventually sends the index through 89.62 high.
While another fall cannot be ruled out for the moment, we'd continue to look for reversal signal as the decline from 89.62, as well as the consolidation from 88.46, are both expected to conclude inside 75.89/77.67 support zone.
The Week ahead
FOMC meeting will take center stage this week. Fed is not expected to change interest rate nor its quantitative easing program soon. But the statement will also be closely watched to see if Fed changes its tone to more optimistic about recovery and its position on the timing of withdrawing from the current monetary policy. Also, markets will pay attention to US data including retail sales and CPI on subsequent impact on stocks and currency markets. Another main focus will be BoE inflation report which should provide insight on why BoE opted to surprise the markets by expanding its quantitative easing program last week. In addition, focus will also be on Eurozone GDP report which is expected to show contraction in the economy has significantly slowed in Q2.
To summarize, important economic data this week include:
- Tuesday: BoJ rate decision, UK Trade balance, Canadian housing starts, US non-farm productivity
- Wednesday: UK employment report, BoE inflation report, Canadian trade balance, US trade balance, FOMC rate decision.
- Thursday: Eurozone GDP, US retail sales, import prices
- Friday: New Zealand retail sales, Eurozone CPI, US CPI, industrial production, U of Michigan consumer sentiments
EUR/USD Weekly Outlook
Despite edging higher to 1.4446, EUR/USD's sharp reversal from there and the break of 1.4206 support serves as an early alert that the pair has topped out. Initial bias will remain on the downside this week for further decline towards 1.4007 support first. Break there will add much credence to the case that that a medium term top is already formed at 1.4446 and turn focus to 1.3747 support for confirmation. On the upside, above 1.4272 minor resistance will turn intraday outlook neutral first.
In the bigger picture, as noted before, rise from 1.2456 is treated as the third leg of the whole consolidation pattern that started at 1.2329. Last week's sharp reversal argue that such rise has possibly completed with five waves up to 1.4446 already, on bearish divergence conditions in daily MACD and RSI. Break of 1.3747 support will confirm this case and bring deep decline that will eventually send EUR/USD through 1.2329 low. On the other hand, above 1.4446 will in turn indicate that rise from 1.2456 is still in progress. But after all, strong resistance should be seen as EUR/USD approaches 61.8% retracement of 1.6039 to 1.2329 at 1.4622 and finally bring reversal.
In the long term picture, as we're treating price actions from 1.2329 are merely consolidation in the larger down trend, the fall from 1.6039, therefore, is expected to resume after completing the consolidation. Below 1.2329 will confirm that such down trend has resumed for at least a test on 1.1639 key long term support. We'll hold on to this long term bearish view as long as 1.4867 resistance holds .