Since last week’s Federal Reserve decision, the dollar has risen solidly against the major currencies, although less so or not at all versus emerging market currencies.
With the greenback soft across the board Monday, traders wondered if they should use the current dip to go long dollars.
In the wake of last week’s Fed decision, some analysts have brought forward their first Fed rate hike to sometime in 2015 and U.S. Treasury yields, both short-term and long-term are expected to press higher in the weeks ahead, as long as U.S. data cooperates.
Because of this, traders debated if recent dollar gains may be the start of the long-awaited dollar rally that has been viewed as “in the works” for nearly two years.
Having been burnt badly on many occasions by holding a dollar long, they awaited further proof before again favoring the greenback.
“I still think our yields are headed higher,” said one U.S. trader, adding, “You have to sell euros on rallies.”
His downside target for the euro was in the $1.3400-$1.3500 zone, levels last seen in February.
CitiFX technical analysts Monday said that their major USD charts suggest “that the USD rally has likely resumed just as the turn in U.S. yields has taken place.”
The US-dollar-index, trading around 79.870 (high earlier at 80.290) in afternoon action Monday, saw a weekly close above the December 2013 low of 79.68 last Friday, with weekly momentum rising also, they said.
“Decent resistance levels come in at 81.38-81.45 which are likely to be tested over the coming weeks, CitiFX said.
If indeed upward momentum was beginning to mount in the dollar-index, “the set-up may be seen as a “double-bottom pattern with a neckline at 81.48,” the analyst said.
“A weekly close above there would open the way for 83.68 at a minimum,” they said.
The last time the dollar-index traded around 81.45 was early to mid November 2013, when the euro bottomed around $1.3296 (Nov 7).
The euro was trading at $1.3837 Monday, on the high side of a $1.3760 to $1.3876 range.
The pair topped out at $1.3967, on March 13, underpinned by safe-haven demand (for German Bunds) ahead of the Crimea Referendum, with many players thinking that the pair might soon test the psychological $1.4000 mark.
Last week, after the Referendum and its well-expected outcome, the euro remained buoyant initially, albeit lackluster, but then succumbed to profit-taking ahead of the Federal Reserve decision.
After the Fed meeting, with U.S. Treasury yields rising, the euro ratcheted lower, breaking below various key levels of support to post a two-week low of $1.3749 before stalling.
A euro break below $1.3750, if followed by a move below its 55-day moving average, at $1.3700 currently, would target a test of the Feb 27 lows around $1.3643.
The pair would need to take out its 200-day moving average, just under $1.3500 currently, for a potential move away from a $1.3500 to $1.4000 range to a $1.3000 to $1.3500 range, traders said.
A logical euro sell-level comes in around $1.3884 (61.8% Fibonacci retracement of the $1.3967 to $1.3759 decline), which should prove a tough resistance zone, they said.
The euro has found underlying support from EMU stability, which has seen peripheral sovereign yields falling to fresh lows since 2005, noted BBVA strategists.
“The net capital flow attraction of the EUR has been bolstered by improving EMU PMIs, surging German industry data and a lack of dovish ECB action,” they said.
Nevertheless, the greenback “has clawed back some recent losses after a growth confident and hawkish FOMC,” the strategists said.
BBVA saw the euro “downside being irresistible into summer as U.S. data rebounds from 1Q weather disruption, pushing EURUSD to $1.33 by July.”
“In other G-5, GBP and CHF face marginal weakness as good news data is already priced in,” the strategists said.
UBS fine-tuned their FX forecasts at the end of last week, in light of the Fed decision and press conference.
“During last week’s FOMC meeting, Fed Chair Yellen implied that the first hike to the Fed Funds target could happen as early as Q2 2015 – This is likely to render the dollar increasingly sensitive to a faster rebound in U.S. economic data over the coming months,” UBS strategists Geoffrey Yu and Maximillian Lin said in a note.
While their one and three-month euro forecasts remained at $1.3500 and $1.3300 respectively, UBS adjusted its one and three-month cable forecasts to $1.6300 and $1.6000 (from $1.6100 and $1.5800 previously).
UBS’s dollar-Canada forecast for one and three-months (respectively) has been revised to C$1.1300 and C$1.1500, versus C$1.1000 and C$1.1200 previously.
Their one and three-month dollar-yen forecasts remain unchanged at Y105 and Y108, respectively.
Cable was trading at $1.6500, dollar-Canada at C$1.1190, and dollar-yen at Y102.21, Monday afternoon.