Originally published by AxiTrader
The US dollar rallied up and through the recent range top in US Dollar Index terms last week and broke important support at 1.1660 against the euro.
These late week moves came largely as a result of more pushback from central bankers against the prevailing market view that the uptick and synchronisation of global growth meant there was also a synchromisation of global central bank policy.
But both the Bank of Canada and the ECB both signalled clearly they will be charting their own course.
And the US dollar's rally was the result with EUR/USD falling into the 1.1570's before recovering to 1.1610 this morning while the US Dollar Index rose above 95 before pulling back into the 94.80's this morning.
Such a swift move in the space of a couple of days naturally leads to some question about the pace of the move. But I want to share two charts which suggest that this US dollar move could run much further.
Firstly, the improved data flow in US economic data and Mario Draghi's clear message the ECB is at a very different point in the cycle to the US Fed supports a much bigger fall for the EUR/USD.
A big part of the US dollars weakness was the improved sentiment toward the euro project that resulted from the French election. But it's equally the case that around the time traders stopped worrying the EU could pull itself apart US data started to collapse.
US dataflow, as measured by the Citibank Economic surprise index for the US, has been picking up over the past couple of months. And while that helped the US dollar bottom to a certain extent it was the fact that traders saw a synchronisation of growth and thus central bank policy which held back the rally.
Now that Mario Draghi, and other central bankers, have signalled the return of policy divergence the US dollar is free to play a little catch up. Perhaps not the 1.08 level this relationship between the US dollar and the euro implies. But certainly towards the 1.1240 region where the 200-day moving average sits.
The second reason to be bullish the US dollar, especially against the euro, is the still overextended level of US dollar negativity evidenced in positioning data from the CFTC. Data released Friday for the euro, as at last Tuesday, show that the level of net long euro positions for speculators sat at the upper end of net longs over a 5 and 10 year period.
Now of course the euro collapsed through support since this data was collated on Tuesday for a Friday release. But the extreme level of exposure suggests that at the very least rallies will be offered as traders exit longs and that there is a high chance of further downside probes if US data this week continues to print at or better than expected.
As I said in my Markets Musing earlier today, it’s still the case that 1.1500/20 is the first target as the 38.2% retracement level of the big rally from April. Once that – assuming it does – gives way then there is every chance euro falls toward the 200 day moving average at 1.1240.
Have a great day's trading.