US Dollar: Time To Worry?
Four weeks ago, the USD index hit 3-year highs, metals licked their wounds from the biggest decline in decades and the US growth story stood out in the headline. The Fed was considered the only major central bank capable of scaling down its quantitative easing, while the ECB mulled cutting interest rates to zero. The greenback was boosted by a powerful combination of fundamental and technical moving in tandem.
But all changed in June when the Fed reminded that any tapering of asset purchases would not necessarily tighten monetary policy as persistent growth in the Fed’s balance sheet would help maintain liquidity driven in the markets.
The Fed’s statement was not isolated. Signs of stabilization in the business surveys of the Eurozone and the UK PMIs as well as market scepticism with Japan PM Abe’s “policy arrows” conspired to rebalance the flows in currency markets.
The timing of the aforementioned dynamics is never a coincidence. From a charts perspective, the greenback had tested an 8-year trendline resistance (see chart), EURUSD tested a 12-month trendline support and the yield on the US 10-year government note tested its 6-year trendline.
Levels to Watch
The list of explanations can go further and so do the plausible scenarios for a continuation of the USD’s downtrend as well as its recovery. As it stands, we expect further strength in both the yen and sterling against the USD into the rest of the month until the USD index retests its 2-year trend support at 80.40-45. This implies an equivalent resistance near $1.3450s and $1.5660s in EURUSD and GBPUSD respectively.
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