Weekly Review and Outlook: Dollar Soared Broadly, Look ahead to FOMC, GDP and NFP

Dollar surged broadly last week with support from some solid economic data. Moreover, Euro was weighed down by geopolitical tensions in Ukraine and weak economic outlook. Sterling also weakened against the greenback as BoE minutes toned down the chance of rate hike. Nonetheless, Aussie ended the week as the strongest currency with boost from inflation data as well as Chinese manufacturing data. There was also some support for the Aussie as Kiwi dived as RBNZ signal pause in tightening after last week’s rate hike. In other markets, SP 500 surged to new record high of 1991.39 but pared back much gains on Friday. DOW tumbled sharply on Friday too to close below 17000 handle at 16960.57. 10 year and 30 year yields were stuck in range for most of the week but did end lower at 2.469 and 3.244 respectively.

A major question after the week is how strong the greenback is and whether the rally is sustainable. Taking a look at the dollar index, the break of 81.02 resistance last week confirmed resumption of whole rise from 78.90. Upside momentum remains health as seen in daily MACD and we’d likely see more upside in near term. And, outlook will stay bullish as long as 80.71 support holds. Nonetheless, we’d maintain that 81.02/48 represents an important resistance zone. The greenback will need some sustainable buying momentum to push through this zone. And a reversal from there, followed by break of 80.71 support will argue that the sideway pattern from 79.00 is still in progress and will turn near term outlook bearish again.

However, it should be noted that decisive break of 81.48 will confirm that the index has finally declare victory in defending key fibonacci level of 50% retracement of 72.69 to 84.75 at 78.72. And the sustained trading above 55 weeks EMA would also confirm trend reversal. that would open the case for further rise back to 84.75 key resistance in medium term. So far, markets seem to be finally starting to believe that Fed would start raising interest rates next year. And this week’s FOMC meeting, July non-farm payroll and Q2 GDP report would be crucial to further affirm such expectations.

Let’s take a look at dollar’s outlook against other major currencies. EUR/USD’s break off 1.3476 support and the medium term trend line argues that the up trend from 1.2042 (2012 low) is completed at 1.3993 already. This is supported by the firm break of 55 weeks EMA too while weekly MACD also turned negative. Current development suggests that EUR/USD is now heading back to 1.2755 key support level, which is close to 61.8% retracement of 1.2042 to 1.3993.

USD/CHF resumed the rise from 0.8698 last week. The correction pattern from 0.9771 (2012 high) could have completed with three waves down to 0.8698 already. This view is supported by the strong close above 55 weeks EMA, and with 55 week MACD turned positive. Though, we’d prefer to see decisive break of 0.9156 near term resistance to confirm.

While GBP/USD dropped sharply last week, it’s still staying inside the medium term rising channel. There was sign of reversal with bearish divergence condition seen in weekly MACD. Also, recent top of 1.7190 is reasonably close to 50% retracement from 2.1161 to 1.3503 at 1.7332, which we expect to hold. Chance of reversal is high but still, we’d prefer to see decisive break of 1.6692 support to confirm.

USD/JPY stayed in the consolidation pattern from 105.41 and last week’s recovery suggests that it has defended 100 key support level again. While further rise is mildly in favor in near term, we’re skeptical on dollar’s strong above 102.79 near term resistance. Also, we’re seeing no sign of trend resumption yet. Overall, we’d expect sideway trading to continue in medium term, with an eventual downside breakout mildly favored.

The outlook in USD/CAD was much clearer. The break of 1.0813 resistance, as well as the 55 weeks EMA should confirm that the correction from 1.1278 has complete at 1.0620. That’s just above 1.0608 cluster support and the long term trend line as expected. We’d now expect further rise in near term to 1.0960 resistance and break will pave the way for up trend resumption through 1.1278 high.

AUD/USD stayed in sideway trading last week as the consolidation from 0.9504 continued. The pair seemed to have struggled to move away from 55 weeks EMA and lost some momentum as seen in weekly MACD. We’re expecting some consolidations ahead with risk of another near term fall. Nonetheless, overall medium term rise from 0.8659 is expected resume after completing the consolidation.

So overall, the greenback has clear advantage against Euro and Canadian dollar. We also favor the greenback over Sterling and Swiss Franc but would prefer to see more evidence to confirm. Meanwhile, we’re not seeing much advantage of dollar against aussie and yen in medium term.

Regarding trading strategies, our EUR/USD short was correct last week and based on the medium term bearish outlook, we’ll hold on to the short position for the moment. The AUD/CAD short position was closed in loss as the cross rebounded on resilience of Aussie and weakness in Canadian dollar. An interesting pair to watch in the coming two to three weeks would be GBP/AUD. Firstly, we’ll look at whether sterling would finally be dragged down by Euro against dollar. Secondly, we’d like to see when EUR/GBP would finally reverse. Also, thirdly, when the resilient AUD/USD would complete its near term consolidation and extend the medium term rebound. We’ll hold our hands off GBP/AUD first but this could be a potential short candidate in August.

EUR/JPY dropped to as low as 136.36 last week but lost some momentum on bullish convergence condition in 4 hours MACD and recovered. Initial bias is neutral this week first. As long as 137.71 resistance holds, deeper decline is still expected in the cross. It’s now in the third leg of the pattern from 145.68 and should target 136.22 support. However, break of 137.71 resistance would be the first sign of near term reversal and wold turn bias back to the upside for 139.27 resistance for confirmation.

In the bigger picture, loss of upside momentum was seen in bearish divergence condition in weekly MACD. However, EUR/JPY is so far holding above 135.50 key support. Thus, there is no confirmation of trend reversal yet. Break of 145.68 will extend the up trend from 94.11 towards 76.4% retracement of 169.96 to 94.11 at 152.59 before topping. Meanwhile, break of 135.50 will confirm reversal and target 124.95 support.

In the long term picture, rebound from 94.11 long term bottom is having an impulsive look and thus, indicates that it’s far from being finished. 139.21 key resistance was already taken out but there is no clear sign of topping yet. However, upside potential for the moment from long term perspective is limited. We’d anticipate a correction any time, followed by another medium term up trend to retest 169.96 high.

EUR/JPY 4 Hours Chart

EUR/JPY Daily Chart

EUR/JPY Weekly Chart

EUR/JPY Monthly Chart

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