The euro’s recent sharp gains could come to an abrupt end this week, as we anticipate that the European Central Bank President Mario Draghi will deliver a verbal intervention at its meeting on Thursday and dismiss speculation that the bank will end QE earlier than anticipated. This could help boost the Dollar Index, which fell to a fresh three-year low today.
The dollar took another pounding after US Treasury Secretary Steven Mnuchin said of the weaker currency as being ‘good’ for US trade. Mr Mnuchin also added that expected growth in the economy would support the dollar in the long term.
If he is correct, then the dollar could make a comeback at some point in the near future. After all, the US economy is still among the strongest in G10, with the Federal Reserve being the most hawkish of central banks out there, too. The dollar may get an oversold bounce in the coming days anyway as the major currency pairs test massive long-term levels, ahead of the release of US GDP on Friday. But perhaps its best chance for a comeback may be after 8th February when the US government is expected to run out of cash again. If and when the budget is finally passed then the dollar bears may find it difficult to justify selling the reserve currency further.
The latest drop in the Dollar Index (DXY) has push it down to another significant support between 88.50 and 89.50, levels which were previously resistance. Given that other similar levels have broken down in the past, we are not so confident about the prospects of a significant bounce here at this stage. Even if the DXY bounces here, we would treat it as just a technical oversold bounce until there is a break in market structure of lower lows and lower highs.
Consequently, we won’t be able to call it a bottom unless the DXY goes on to take out key resistance levels such as 91.05, 91.92, 92.65 and finally 94.22. But make no mistake about it, the dollar’s long-term uptrend may still be intact and the entire pullback since the start of last year could just be a retracement. Always have that at the back of your mind.
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