The moves seen across Euro pairs overnight have drastically changed the sentiment for the US Dollar, which was already struggling to gain traction despite the Fed maintaining a hawkish stance.
Only yesterday we outlined the potential for the US Dollar index to remain trapped between 96.50 – 97.80 for the foreseeable future, yet Draghi changed that in his speech.
Whilst the timing was off, we are not surprised by the decision for Draghi to turn slightly more hawkish. The economy is ticking along nicely and leading indicators and sentiment continue to have higher hopes for the future. So, if hard data now backs up this view then a weaker US Dollar could be on the cards.
Due to the aggressive bearish bar yesterday, it is difficult not to see this move lower extending. Granted, the low did stall just above 96.30 support but this is more likely to generated a mild rebound at best. Therefore, the next key level in view becomes 95.88, which marks the low printed in the hours leading up to Trump’s acceptance speech. The ‘abc’ pattern highlighted appears to be an expanded flat. As this tend to trick traders into at least two incorrect moves before returning to the higher trend, it also points to further downside. The low which we now label ‘b’ would have appeared to be a bearish continuation, which promptly turned around after the Fed meeting. Likewise, what is now ‘c’ likely also caught investors out as part of a bull-trap, only to plummet lower. The psychology of this move is important to understand because it now provides yet more reasons to sell the Dollar, as we have a diverging theme. Buy Europe, Sell US.
To put yesterday’s trading range into perspective, we have plotted the historical open to open (OO) prices as a percentage for the past 20 years. The OO range was -1.03% and only marginally smaller than the high to low range of 1.15%. Only 1.51% of the time has the OO range been between -1% to -1.2%, and only 3.9% has it been a more bearish read than 1.03%. What this basically means is that the US Dollar is on the back foot, and it could now provide multiple opportunities to short US crosses. One such one we heighted a couple of times since last week was to short USDCAD, as oil prices were more likely to rebound than extend the already oversized losses.
We finally saw a close beneath the bullish trendline, which also broke the MS2 to the downside. In similar fashion to DXY, the prominent swing has only by emphasised by the bearish follow-through although in this instance the said high also rejected the 200-day average. This latter point makes us suspect we may see more downside potential on USDCAD than say DXY.
A slight reservation for the near-term is its reluctance to extend losses during Asia as it loiters just beneath the MS2 pivot. Whilst pivots can aid as targets or potential S/R when clustered with other technical levels, they tend to generate a lot of noise around them when seen alone. Therefor we would not be too surprised to see a round during either Europe or early US, but we are ultimately seeking a move down to 1.0305 support. Until we see a break of the 1.3349 high, further downside looms.
This also puts CNH back onto our radars as a macro barometer for the US Dollar. After testing the 100% extension then promptly bouncing higher, we had pondered whether the end of an ABC correction had been seen from the 6.9866 high. Yet at current prices CNH would be on track for a bearish outside week which leaves potential for a lower higher. If we see CNH falling hard, chances are it is not restricted to the USD cross.