Dollar Stays Weak after Broad Based Selloff, ECB Draghi Watched

Dollar stays weak in Asian session as the broad based selloff is extending. Dollar index broke 90 handle for the first time in more than three years after US Treasury Secretary Steven Mnuchin’s comment that a weak dollar is good for trade. One explanation for recent weakness of the greenback is that global central banks would be starting to follow Fed’s path of tightening. And that kept Dollar soft ahead of this week’s BoJ and ECB meeting. However, the downside acceleration since Mnuchin’s comments could now be taking the selloff to another level. In particular, markets would be looking forward to comments from ECB president Mario Draghi in the post meeting press conference. Any hawkish flavor in Draghi’s message could prompt another round of sell-off in Dollar.

Weak Dollar might not be good

Mnuchin’s, and likely President Donald Trump’s too, preference for a weak dollar is relatively rare. Traditionally, the White House usually prefer a strong currency. While Mnuchin believe it’s good for trade, there are counter arguments that a weak Dollar is bad for the economy as a whole. In particular, Dollar’s status as the world’s reserve currency could be threatened. It’s already reported that China is considering to diversify away from Dollar assets and dollar’s depreciation could accelerate the process. Also, further downside acceleration in dollar could prompt capital outflows that could push up interest rates and drag down stocks.

Dollar index on track to 87.23

Technically, we’re maintaining the view that Dollar’s down trend from 103.82 is a corrective move. After taking out 91 key level, it’s now heading to 61.8% projection of 103.82 to 91.01 from 95.15 at 87.23. At this point, we’re expecting strong support from 84.58/85 cluster support to complete the correction. This cluster zone represents 84.75 (2013 high) and 61.8% retracement of 72.69 to 103.82 at 84.58.

Focus on ECB forward guidance

ECB is widely expected to keep monetary policies unchanged today. The main refinancing rate will be held at 0.00%. Also, the EUR 30b asset purchase program will be kept unchanged and will run through September. However, since the release of the December meeting accounts, there are speculations that ECB could start to tweak its forward guidance. And, it might drop the pledge to extend the asset purchase program if necessary. Indeed, some ECB officials have openly given the nod to putting and end date to the program. It would be a dilemma for President Mario Draghi today considering the surge in EUR/USD this week. Any hawkish change in the forward guidance will definitely shoot of EUR/USD, which ECB would not like to see.

On the data front

New Zealand CPI rose 0.1% qoq, 1.6% yoy in Q4, much weaker than expectation of 0.4% qoq, 1.9% yoy. Germany will release Gfk consumer sentiment and Ifo Business climate. UK will release BBA mortgage approvals and CBI reported sales. Canada retails sales will be feature later in the day. US will release trade balance, jobless claims, wholesale inventories, new home sales and leading index.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.2326; (P) 1.2370 (R1) 1.2452; More….

EUR/USD’s rally is still in progress and reaches as high as 1.2438 so far today. Intraday bias remains on the upside for target next key fibonacci cluster level at 1.2494/2516. At this point, we’d still expect strong resistance from there to limit upside and bring reversal. On the downside, below 1.2322 minor support will turn intraday bias neutral first.

In the bigger picture, rise from 1.0339 medium term bottom is still seen as a corrective move for the moment. Therefore, in case of further rally, we’d be expect 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 to limit upside and bring reversal. That is also close to 61.8% projection of 1.0569 to 1.2091 from 1.1553 at 1.2494. Break of 1.1553 support will confirm completion of the rise. However, sustained break of 1.2516 will carry larger bullish implication and target 61.8% retracement of 1.6039 to 1.0339 at 1.3862.

Economic Indicators Update