The technical indicators warn that the US dollar is stretched, but the combination of disappointing auto sales and jobs report may deny it the interest rate support needed to facilitate a resumption of the bull market. While there are many observers talking about the abdication of the US from its global leadership role given the decision to pull out of the Paris Accord and the TPP, we think the dollar’s performance can be explained by changing perceptions about the pace of US economic activity, the direction of inflation, and prospects for significant tax reform and infrastructure spending.
There is a light US economic calendar in the week ahead, and the quiet period ahead of the June 13-14 FOMC meeting means that investors are unlikely to get much guidance from officials. The focus will be squarely on Europe with the ECB meeting and the UK election.
The Dollar Index finished the week at new lows for the year, and just above the 61.8% retracement objective of the rally from the lows seen in May last year (96.45). A convincing break brings two technical levels into view. The first is around 95.20. It is a measuring objective of the old head and shoulder pattern that had been formed between December 2016 and March 2017. The second is near 94.20. It is the 38.2% retracement objective of the Dollar Index’s 2012-2014 lows near 78.60.
The euro appreciated for the sixth week of the past eight. Nearly three-quarters of the 0.7% gain on the week were scored on the back of the disappointing US jobs report. Before the weekend, it posted its highest close since last September, as works its way closer to the spike high last November ($1.13). The strength of the close warns of risk of a gap higher opening in Asia on June 5. Given the proximity of $1.1300, current volatility, and momentum, an upside break cannot be ruled out. A break of $1.1300 could signal a move to $1.1400-$1.1425.
The dollar has fallen against the yen for five of the last six sessions. Before the weekend, it was trading on either side of the previous day’s range (outside day) and closed below the previous day’s low. Indeed, the early in the session it made a new high for the week. Then in response to the jobs’ disappointment, it made a new low for the week. Support is expected in front of JPY110, and a break could see JPY109.40-JPY109.60. However, if US yields do not find better traction, a return to the JPY108 area seen in mid-April is possible.
