The Dollar Reverses Lower: Is this Real?

The dollars bounce extended further than we expected, helped by an aggressively hawkish view of the Fed, which has seen the market price in more than one hike before the end of next year.

The dollars rally into early July left the technical indicators stretched, and we note that near-term trend reversals recently have occurred around the end of the month or US jobs report.

Despite the first employment report that beat expectations in three months, US interest rates softened. In fact, the implied yield of the December 2022 Eurodollar futures contract fell four basis points. The contract traced out what appears to be a key reversal by making new lows before rallying and closing above the previous high (in price). The two-year note yield, which doubled in June, slipped lower for the fifth session in the past six. The 10-year yield fell every day last week for a cumulative decline of 10 to approach 1.40%, the lower end of where it has traded over the past four months.

The new week begins off slowly with the US holiday on Monday. Given that the individual forecasts of Federal Reserve officials were not discussed at last months FOMC meeting, and Chair Powell played them down, it ought not to be surprising if the minutes were not as hawkish as the dots. Still, while some “buy the rumor sell the fact” type of trading of the dollar was seen after the employment data, the market will want to see follow-through before becoming convinced that the month-long dollar rally is over.

Dollar Index

The Dollar Index rose to a new high since early April ahead of the jobs report, reaching almost 92.75. It sold off and closed near its lows, around 91.20. A potential key reversal was traced out. A break of 92.00 favors a near-term top being in place, and a move below 91.50 would be convincing. The momentum indicators are over-extended but are still pointing higher. As scar tissue shows, even with technical indicators seeming near extremes, prices can continue to rise, but the reversal pattern and weak close is the ideal set-up to mark the end of the month-long rally.

Euro

The common currency bounced off the push below $1.1810 after the employment data but did not take out the previous sessions high (~$1.1885). It snapped a four-day slide. A move above $1.19 would help stabilize the tone. The late June high near $1.1975 needs to be overcome to boost confidence that a meaningful low is in place. The momentum indicators are oversold territory, but if $1.1800 is given, there is little on the charts before $1.1700, which corresponds to the March low and the (38.2%) retracement of the rally since the pandemic low in March 2020 (~$1.0635).