A week ago we were concerned that the dollar’s surge had left it over-extended from a technical perspective and most of the major pairs, but the yen and Canadian dollar were outside their Bollinger Bands. We cautioned against chasing it, but the dollar’s surge continued. It peaked in the middle of the week and stalled. We look for a consolidative/corrective phase in the coming days that will entail a weaker dollar.
The Dollar Index lost a bit more than 0.5% ahead of the weekend, its largest loss in almost a month, and snapped a three-week advance with a 0.25% loss. The technical indicators warn of downside risk. Although there it found some support near 96.00, we suspect there is scope for near-term losses toward 95.25-95.50. It finished last month near 94.35, appreciating for the fourth consecutive month.
The euro eked out a minor gain for the week (~0.2%), which required it to rally a percent from the week’s lows near $1.13. The recovery was signaled by a hammer candlestick on Wednesday and confirmed by follow-through buying. The three-day advance that it carries into the new week ended a four-day slide. The test for the euro bears is in the $1.1470-$1.1500 area. In the bigger technical picture, we have suggested a larger head and shoulders pattern has been carved, and the neckline is around $1.15.It is not uncommon for the neckline to be re-tested after a break.
The dollar has trended lower against the yen this month, and although it bounced off JPY110 at the start of the week, it was unable to break a downtrend line near JPY111.55. It was turned back at set to retest JPY110, where a $1.3 billlion is struck in an option that expires on Monday (August 20). The technical indicators are mixed. A break of JPY109.80 could spur another big figure decline.
Sterling posted an outside down day on Tuesday and reached almost $1.2620 the next day before consolidating. As it consolidated, it appeared to meet fresh sales near $1.2750. The technical indicators suggest the risk is on the upside, but the $1.2770-$1.2780 may provide a barrier ahead of $1.2835-$1.2850.
