Dollar Rallies On Strong Data And Geopolitics

The dollar extended its gains following encouraging economic statistics and negative geopolitical developments. The ISM non-manufacturing index came in at a near 9-year high, with all of the report’s components except prices coming in very strong.

Services account for nearly 80% of the US economy. In addition, factory orders climbed 1.1% month-on-month in June against expectations of a 0.6% increase, which showed that manufacturing and investment in equipment was also doing well. The data again led to speculation that the Fed might be pushed to raise interest rates earlier than the market expects, thereby helping the US dollar.

The euro traded as low as 1.3348 against the dollar, which was a new low for the year and the lowest since early November 2013. The 1.33 level was increasingly cited as a target for dollar bulls.

Geopolitical concerns were also helping the dollar. News that Russia was amassing troops on the border with Ukraine and statements by Polish officials that Russia was preparing for an invasion of Ukraine, hurt risk sentiment as investors sought refuge to safer US assets. Russian President Vladimir Putin talked of a humanitarian catastrophe in Ukraine, a factor that could be used to justify future Russian action. In a sign that the crisis was escalating, Putin instructed his officials to draft ‘counter-sanctions’ to the sanctions by the EU and the US against Russia.

The negative geopolitical developments helped the safe haven yen to steady against the dollar around 102.55, whereas euro / yen dropped to the 137 mark.

For the remainder of the day, UK industrial output for June, Italian 2nd quarter GDP growth and US International Trade for June will be looked at although their impact on markets could be limited.

EURUSD scope for losses to 1.3300

EURUSD extended losses to make a new 2014 low at 1.3348. Technical indicators have turned very bearish, with RSI below 50 and approaching oversold levels and MACD below zero. The Tenkan-Sen and Kijun-Sen lines are increasingly negative, adding to the downside bias.

The next key level comes at 1.3300. There is scope to target the November 7 low at 1.3293. Immediate resistance is seen at 1.3444, August 1 high. This is also the 78.6% Fibonacci retracement level of the 1.3293 – 1.3992 upleg.

The bearish outlook remains strong as long as EURUSD trades below 1.3400.