Sat, Jan 22, 2022 @ 14:40 GMT
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Draghi sends USD higher in face of soft US data | DXY, USDJPY

Despite weak data from thr US, it was dovish comments from Draghi and hawkish comments from the Fed which helped lift the Dollar.

Speaking to students in Lisbon, Draghi once again lowered expectations of ECB tightening to send the Euro lower and support the Greenback. This helped to erase losses seen from weak durable goods and manufacturing data, which was extended further once Fed members continued their hawkish commentary.

Durable goods and manufacturing sentiment added to the long list of weak data from the US, to weight on the Greenback despite further hawkish comments from Fed members. Durable goods declined -1.1% compared with -0.8% prior and -0.6% expected. This makes it the 2nd month of contraction which has helped drag the YoY rate to just 2.7%. Excluding transportation durable goods managed to squeeze a 0.1% expansion in June, yet does not quite claw back the -0.5% contraction in May. The YoY% rate however is at a slightly heathier level of 5.5% and the underlying index is just below 3 year highs.

GDP data for Q1 will be revised this week, although the real concern going forward is that data so far for Q3 is also below par and leading sentiment indicators aren’t reviving hopes of a rebound. If we continue to see PMI surveys soften and hard data such as durable goods, inflation or growth struggle to rebound then it essentially kills off any need for the Fed to raise. Markit PMI data also disappointed on Friday and these reads can lead the rise of fall of GDP by 6-12 months on average.

For the foreseeable future, we doubt the US Dollar Index will be able to break out of the 96.50 – 97.88 range. Whilst the Fed continue with their hawkish narrative to help support the Dollar, the data which is presented prevents it from breaking higher. This also means we doubt we’ll see significant trends develop unless we see either of these opposing forces switch to the other’s side (dovish fed with weak data, or hawkish fed with strong data).

D1 closed with a bullish piercing pattern to warn of near-term strength, although at current levels the rewards to risk ratio may be undesirable to trade D1 as we are too close to the monthly pivot (black line). Moreover, the rally from the bullish pinback may be part of a correction higher which also limits the potential upside form here. So, we may want to monitor for signs of weakness below 97.881 to aid timing a long position on EURUSD. An alternative scenario (and least favoured under the current climate) I for an inverted head and shoulders pattern to materialise. We would need to see a form close above 97.88 (neckline) and if successful it projects an approximate target around 99.50.

A more bullish scenario appears to be forming with USDJPY. We highlighted the minor pullback above 11080 last week and we have now seen a bullish follow-through. If we can clear the 112.10 resistance level then we find ourselves in an area which has relatively little in the way of resistance towards the 114.38 target. If we are to see a decent close above 112.10 then the odds of a direct rally towards target is increased. Yet if we are to falter around current levels and return to 110.80, then we must consider a deeper pullback and frustratingly slower journey towards the eventual target.

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