Oversold Dollar May Struggle To Push Lower

This could turn out to be a wild month with the backlog of US data beginning to line up, coupled with the tentative first glimpse at whether of not the US shutdown had any lasting effect on the health of the US economy. Focus will revert to the Non-Farms payroll data which we have been without for some time. The dollar has sold off nearly continually ever since Bernanke slammed the markets with his comments to quell taper speculation, although it remains unclear how much further the dollar can drop in the short term. Fundamentally, there is still every reason to sell the dollar. Ratings agencies have slammed the US shutdown. What little data there has been hasn’t been amazing and European data continues to be good. The Yen has maintained it’s position outside of the long standing bearish channel which could indicate further upside. The pound, Euro and Swiss franc remain very overbought though and could have done with a much deeper retracement than we have just had. this all points towards a messy chop lower for the dollar and a reluctant stumble higher for the Europeans. Australian dollar, having been the best performer recently is now very much into overbought territory, so could see some profit taking at the cluster of resistance just above current levels around 0.9700.

This week’s data focus is on the following releases:

Monday Oct 21
3:00pm USD Existing Home Sales

Tuesday Oct 22
1:30pm USD Non-Farm Employment Change
1:30pm USD Unemployment Rate

Wednesday Oct 23
1:30am AUD CPI
9:30am GBP MPC Asset Purchase Facility Votes
9:30am GBP MPC Official Bank Rate Votes

Thursday Oct 24
2:45am CNY HSBC Flash Manufacturing PMI
8:00am EUR French Flash Manufacturing PMI
8:30am EUR German Flash Manufacturing PMI
1:30pm USD Unemployment Claims
3:00pm USD New Home Sales
5:45pm GBP BOE Gov Carney Speaks

Friday Oct 25
9:00am EUR German Ifo Business Climate
9:30am GBP Prelim GDP
1:30pm USD Core Durable Goods Orders

All times are London time (GMT+1)

USD% Index

Following last week’s dramatic drop lower after the shutdown debacle, the dollar has found it’s feet and is now quite oversold, which could see a retracement in the short to medium term. RSI is pushing into reversal levels although has broken well below the current RSI reading at various points during this ugly and bumpy downtrend, so further downside is still possible. With sentiment still very much dollar negative, it will take a catalyst such as a great NFP to push the reversal higher. otherwise, we seem likely to have more terrible chop. I remain bearish USD although expect some consolidation

USD% Index Resistance (EUR/USD support): EUR/USD 1.3663, 1.3639, 1.3614
USD% Index Support (EUR/USD support): EUR/USD 1.3700, 1.3778

EUR% Index

Last week’s push higher ran out of steam on Friday ahead of the weekend, so this week should be decisive to see if there is any momentum left in the move higher, or whether we have pushed too far into overbought. We could conceivably just have some choppy consolidation before a move higher towards the 100% fib expansion, although this will be data dependant since any positive labour market data will renew taper hopes and push the Euro down. I remain bullish EUR although suspect the trend is becoming exhausted in the short term

EUR% Index Resistance: EUR/USD 1.3761, 1.3811
EUR% Index Support: EUR/USD 1.3683, 1.3640, 1.3600

JPY% Index

We remain trapped within an expansing triangle of trend lines on the JPY% index and as such a drop down to the lower trend lines may be on the cards, particularly if the dollar selling has run out of steam. If 97.59 is significantly breached though, it would open the door for a rally (USD/JPY sell-off) up to JPY% index resistance shown at USD/JPY 96.37. I remain bullish JPY in the medium term although expect a push lower to meet support before continuation

JPY% Index Resistance (USD/JPY Support): USD/JPY 97.59, 97.15, 96.37
JPY% Index Support (USD/JPY Resistance): USD/JPY 98.86, 99.50

USD/JPY Trade Positioning

long from from 97.94, stops at 96.35

GBP% Index

The pound really found it’s feet again last week following the strong selling recently, however is yet to make a new high, and as such is at risk of forming a bearish head and shoulders unless some renewed bids push the index higher. We are quite close now to a very major turning point for the pound, which if breached could signal a major acceleration higher. The level at GBP/USD 1.6350 is now within spitting distance and is a very long standing level of resistance for the GBP% index. As such, the possibilities of major reversals are increasing, however any renewed hope for a taper could break this if we start to get some good NFP data. That possibility somehow seems quite abstract though following the shutdown so reversal patterns should now be sought I remain bullish GBP although expect a major reversal soon

GBP% Index Resistance: GBP/USD 1.6192, 1.6295, 1.6350
GBP% Index Support: GBP/USD 1.6066, 1.5918

AUD% Index

Now quite overbought, the AUD% index is approaching 0.9700 and a cluster of resistance surrounding that key level which could signal a medium term retracement or even potentially a trend change.

I remain bullish AUD until 0.9700

AUD% Index Resistance: AUD/USD 0.9694, 0.9700, 0.9706
AUD% Index Support: AUD/USD 0.90.9573, 0.9527

CHF% Index

The CHF% index has also failed to make a new high and is at risk of forming a double top unless dollar selling finds some renewed urgency. As such we may see some messy chop higher to meet resistance unless there is some impressive data from the USD this week.I remain bullish CHF although expect a retracement or reversal soon

CHF% Index Resistance (USD/CHF support): USD/CHF 0.8989, 0.8961
CHF% Index Support (USD/CHF resistance): USD/CHF 0.9025, 0.9057, 0.9128