The Week of the Almighty Dollar

This article is written by Matthew Clark who is the owner of Global Forex Pros.

ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years, running FX Desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.

Washington Irving said "The Almighty Dollar, that great object of universal devotion throughout our land." With four central bank rate announcements and non-farm payrolls this week, will traders remain devoted to the dollar?

The dollar finished the month higher against the euro completing eight up-months in a row and, with the greenback printing gains against the yen and the Swiss franc, the dollar index is back up testing multi-week highs.

Given the recent bearish news out of the states this week including Friday's Chicago PMI and pending home sales, where will the dollar go over the next few weeks? The revision to lower personal consumption along with Janet Yellen's less-than-enthusiastic semi annual testimony confirming for the market that patience will remain for the next few months (with the Fed more focused on the actual data before any rate rise), it was a surprise to see the dollar strengthen towards the end of the week.

With that in mind, and looking at the price action, it may be that we can see some final gains for the dollar. Bearing in mind the strength of the dollar, as can been see in the chart of the dollar index below, we have been expecting a multi-week/month reversal. Any new highs for the dollar, especially against the euro, should be short lived.

DXY weekly — Euro Weekly Source: Bloomberg Charts

EUR/USD broke below the 1.1260/70 floor that had held all month, triggering stops and pushing us down to close the week with a loss for the second week in a row. This has switched our view on both technical and fundamental factors to bearish in the short term as we look for one new low in the euro and a high in the dollar index. However, there is a tremendous amount of event risk over the next five days; With four central banks (ECB, RBA, BOC and BOE) the focus will remain on monetary policy divergence with the dollar.

With the lows at 1.1097 still in place we cannot dismiss the possibility that we have seen the low and, on a risk-reward basis, it is not a bad trade to buy it now with a stop below. But with the Greece risk at least postponed for a few months the underlying strength of the dollar may see the tone reasserting itself. Although no changes are expected from Super Mario Draghi this week the details on the quantitative easing program announced last month will be released. With the ECB committed to buying 60 billion Euros each month it may struggle to find enough quality bonds to buy, putting pressure on the whole program and, as such, the euro.

On a purely technical basis the break below 1.1260 completed a wave-4 triangle for a final push lower in the days ahead in a 5-wave decline to new lows around the 1.0750-1.0800 level. We can see clearly that the euro has sold off in this short term chart in five waves, signalling a turn lower has occurred, in either a wave-1 of 5 or as a more complicated correction wave (a). But it does set up in both cases a corrective rally in three waves in the coming days, with the targets for the end of the recovery at 1.1257 (the 38.2%) and the 61.8% retracement at 1.1307. With the market expecting no changes from any of the central banks, Mr Draghi's press conference will be watched avidly by traders looking for some clue for the euro. With the EUR/USD still oversold on a weekly basis and the huge speculative positions still being held we simply cannot rule out a final push lower with Mario failing to excite the markets on Thursday. Only a move back above 1.1400 would negate the bearish view on the euro.