DOLLAR INDEX: Drivers of the Week

The greenback traded lower against all of the major currencies, causing the Dollar Index to fall by nearly 3%. While the move was driven by back-to-back weakness in US data and mixed comments from Federal Reserve officials, the dollar had become extremely overbought in a very short period of time and a correction is natural. Traders needed an excuse to take profits and this week’s disappointing consumer spending and housing market reports provided the perfect incentive. However in the coming week, we are looking for the dollar to bounce as the move in many currency pairs reach key technical levels. USD/JPY has found support near 118.50, while EUR/USD has found resistance at 1.0850 and GBP/USD above 1.50. In fact technical support is one of the main reasons why the dollar could recover in the coming week. The chart below shows that the slide in the dollar index stopped right at the 50-day SMA. The move down to key levels has attracted bargain hunters who share our view that the drivers for the long dollar trade remain intact. Even though some U.S. policymakers support a later rate hike, their comments suggest they all see the Fed tightening by September. Ten-year yields have also found support above 1.8% and on Friday there were positive surprises in U.S. data. Core consumer price growth accelerated on an annualized basis while the continued recovery drove consumer confidence as measured by the University of Michigan’s consumer sentiment index to its second strongest level since 2007. Next week’s U.S. calendar contains mostly second tier economic reports that should not have limited impact on the dollar. While we expect the dollar to bounce, we do not anticipate a resumption of the rally. Instead we look for most of the major currency pairs to remain within their recent range with durable goods, jobless claims, existing and new home sales supporting the consolidative price action. So in a nutshell, the 3 reasons why we believe the dollar could bounce next week are the following:

1. Long Term Dollar Drivers Remain Intact, Yields Find Support
2. Minor U.S. Data Next Week Should Pose No Threat to the Greenback
3. Dollar Index Finds Support at 50-day SMA