Correction may be coming
The dollar has been on a strong run the last couple of weeks, which when coupled with the broad weakness we’ve seen in the euro has led to an accelerated sell-off in the EURUSD pair.
Higher inflation, a strong consumer and a strengthening labour market has backed the Fed into a corner, despite strong pushback on rate talk over recent weeks. But it was Powell’s renomination that was the straw that broke the camels back – beating Lael Brainard (viewed as more of a dove) to the post – and now markets are pricing in a few rate hikes next year starting in June.
While that has driven the dollar higher, the question now becomes how much more can be priced in? Is it primed for correction? Has the sell-off become oversold?
The momentum indicators certainly suggest so. The stochastic on the daily chart remains deep in oversold territory as price approaches 1.12, while on the 4-hour chart we can clearly see a divergence, with the MACD making higher lows as price continued to decline.
That doesn’t mean we’ve hit a bottom but when approaching a key level of support, it may suggest the trend is weakening. If so, a rotation higher could draw attention back to 1.13 initially – recent support and resistance – and then 1.1375 where the high from late last week coincides with the bottom of the descending channel and the 55/89-period SMA band on the 4-hour chart.
