There Remains Little Obstacle On The Horizon To Halt The US Dollar Sell-Off

As another weekend G20 meeting has passed without comment on FX and with continued commitment to maintaining stimulus, the USD has slid appreciably against the majors and gold. The shock headline on Friday that US unemployment hit 10.2% initially sent investors scrambling for the exit of risk-correlated trades, with gold plunging and EURUSD skidding precariously towards downside support. However, once the knee-jerk alarm bells subsided and rational thought regained the upper hand, markets reversed the move with enthusiasm; concluding that the dire employment data merely ensures the longevity of a low interest rate environment.

Since then, EURUSD has confidently regained a foothold above 1.4900 and gold nudges the all-time highs even further upwards ($1008.40 at the time of writing). We feel that the significant events and developments of last week have now defined the major market themes until year end; namely that risk appetite will continue to improve against a backdrop of low interest rates and fiscal stimulus, and risk-assets will persist in rallying at the expense of the USD. The major threats to this trend seem neutralized for now; central banks have been reluctant to rattle fragile consumer sentiment with talk of imminent stimulus withdrawal, and the impact of verbal intervention on currency levels begin to sound hollow without the follow-up of tangible action. As such there remains little obstacle on the horizon to halt this USD sell-off, and we continue to look for short-term corrections to sell more USD into.   After last week’s glut of significant economic data releases and central bank meetings, this week looks set to be far less sensational. Today’s main billing is German Industrial Production, while tomorrow German Final CPI and ZEW take centre stage.

We believe that the drivers of FX markets in the coming days will therefore be predominantly technical; and as significant USD supports gave way overnight, both major and EM currencies look to be targeting moves back towards their recent highs against the USD. EURUSD key resistance lies at 1.5063 (26 Oct high), USDCHF eyes 1.0037 support ahead of a move to parity, and GBPUSD seems to have only weak and disparate resistance between current levels (1.6780) and threatening a return to 1.7000.

Wednesday is a US public holiday but there will be the release of Norway CPI and UK ILO unemployment data followed in the evening by NZ Retail Sales. Thursday sees a slight pick-up in agenda items with Australia Unemployment Rate, Swedish CPI and Eurozone Industrial Production, whilst Friday promises Eurozone GDP and U.Mich. Consumer Confidence out of the US.

The Risk Today:

EurUsd The breakout of the short term downtrend at 1.4930 / 50 and subsequent strong rally at the start of the Asian session above those levels means the medium term uptrend looks to be back in play. The last hope for EURUSD bears that this move is merely a retracement of the 1.5060-1.4625 move seems to be under threat as the pair teeters around/above 1.4970 (which represents 78.6% fibonacci retracement). The pair should find support around 1.4915, and thereafter 1.4815, whilst resistance lies above at 1.5063 (26 Oct high), and 1.5100, with stops behind.

GbpUsd GBPUSD has powered through upside ressitance at 1.6693 and on through 1.6740 (11 Sep high) to touch 1.6840 this morning. Focus now turns to its 1.7041 year-to-date high, with 1.6740 now providing decent support below. RSI still not quite at overbought levels (68 last) so bullish momentum has further room to go.

UsdJpy USDJPY still consolidating in its symmetrical triangle; one of the least exciting pairs in this current move. So far pair has bottomed at 89.69 today, but risk appetite and subsequent demand for JPY-crosses rejected a further move to the downside. Expect support to come in again around 89.60 levels and 89.17 below there, whilst first resistance waits at 90.75.

UsdChf USD slide has prompted USDCHF to breach near-term uptrend and downside support in 1.0132 region, and now looks to target 1.0037 ahead of parity. Resistance above comes in at 1.0200 and thereafter 1.0290.

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