Marc Chandler, Global Head of Currency Strategy at BBH, notes that the technical indicators are constructive for the US Dollar index, suggesting that it could string together two consecutive weekly gains for the first time since late March/early April.
The US employment data underscores the resilience of the US economy. Given the Fed’s commitment to the Phillip’s Curve, the robust jobs growth is sufficient to keep the faith that inflation will rise over time. Yellen can be expected to underscore this in her semi-annual testimony to Congress in the week ahead. The threat that the Bank of England can move more accommodation that it preemptively provided after last year’s referendum has been undermined by poor economic data.
The ECB appears to be preparing investors for a further adjustment of its risk assessment and a reduction of its asset purchases as they are extended into next year. For its part, the BOJ is content to lag behind the other central banks and resist the upward pressure on long-term interest rates.
Since the beginning of May, the Dollar Index has alternated between gains and losses, The modest gain in the first week in July keeps the saw-tooth pattern intact. Although the Dollar Index rose around 0.5%, it did not rise above any important resistance levels or retracement objectives. Nevertheless, the technical indicators are constructive, suggest that the Dollar Index could string together two consecutive weekly gains for the first time since late March/early April. A move above 96.50-96.75 is needed to boost confidence that a low of some import is in place. On the downside, a break of 96.15 may be an early warning that new lows will likely be seen,
Ahead of the US jobs data, the sharp backing up of European interest rates sent the euro to retest high from the end of June which was also the high for the year ($1.1445). The technical indicators favor additional near-term losses, but unless the $1.1320 area yields, it will appear to be a flat consolidation rather than a correction. Initial support is seen near $1.1360. A three-month trendline support comes in near $1.1245 at the end of the week ahead. The 2016 high was set near $1.1615, and the 2015 high was a cent higher.
The dollar rose against the yen for the fourth consecutive week and reached its best since mid-May. Over this run, the greenback gained about 3.2%. At the start of the week, maybe in partial reaction to the LDP’s dramatic loss in the Tokyo election, the dollar was bid through a downtrend line drawn off the January, May, and June highs. It was found near JPY112.75. May’s highs near JPY114.35 and the JPY114.60 (61.8% retracement objective of this year’s decline) are the next hurdles.