Is The Dollar’s Run Over?

The dollar continued to fall back last week. On Friday the EURUSD closed at it’s highest level since 26th August, ending the week at 1.1167. The higher EUR last week was the major contributing factor for the USD index falling back, but the surge in the pound played a significant role too. The rebound to within a whisker of 1.30 on Thursday defined what was a second successive week where the GBPUSD posted a gain of around 500 pips.

However, it wasn’t all about dollar weakness last week, because the JPY lost ground across the board too, most notably versus the GBP, with the GBPJPY touching 141.50 on Thursday- a gain of over 10% since the low at 126.55 reached on 3rd September. The higher EURUSD, coupled with the USDJPY moving back above 108.50 also ensured the EURJPY lifted out of its most recent 115-120 range, when the price traded to as high as 121.35 last week.

Turning back to the dollar and how it ended up last week. The USD index closed at 97.28, quite some way below the high at 99.66 posted on 1st October. That fall back has actually been quite precipitous by recent price action dynamics. Perhaps more significantly, that close on Friday was technically weak, as it was below the 200 day moving average which was at 97.385 on Friday. To getter a better idea of that please take a look at the chart below.

Looking at this chart you can see the price just dipping, and closing below the yellow line which is the 200DMA. However, if look further back you can see this happened previously, back in June, only to later reverse the losses and rebound again over the coming 3-4 months. Hence, whilst technically negative, it’s by no means a certainty that the dollar will not rebound again.

Beyond any contrasting rebound in the pound over the past couple of weeks, the major reason for the dollar’s relapse may have been down to the significant rise in German bond yields. Since the end of August the German 10year bond yield hasbeen rising steadily, from a low point of -0.72%, to a close last week at -0.38%. Granted that’s still not necessarily a goodenough reason to start rushing into the EUR from a longer term perspective, but it has certainly helped to lift the EURUSD back up from its low (1.0879) this year.

It is also worth noting, that despite the USD index posting a technically weak close on Friday, the EURUSD has yet to seriously threaten to do something similar in terms of breaking above its 200DMA. That is currently at 1.1210 and may yet prove a tough hurdle to climb. So, with that in mind it is also worth noting that the ECB will be holding their monetary policy decision later this week, on Thursday. No changes to any of the current benchmark rates are presently expected.

This Thursday will also mark Mario Draghi’s final policy meeting at the helm of the ECB. Draghi is due to step down on 1st November when the new boss, Christine Lagarde will take over. This could make for an interesting policy meeting later this week, and perhaps an even more significant final press conference hosted by Draghi.  Outside of that it is a very light week ahead for economic releases and scheduled events. One event to note for those interested in the Norwegian krone will be the Norges Bank policy decision on Thursday, as noted below. Elsewhere, the spotlight will of course be on the UK and the pound anyway.

Meantime, the dollar is down, but certainly not yet out. The latest US data releases are certainly evidencing a degree of weakness, but as yet there is still no change in the consensus that the Fed will leave rates unchanged when they next decide at the end of this month. The FOMC policy decision is due at 6pm on 30th October. Furthermore, there’s very little in the way of fresh economic data due out between now and then topossibly alter their current outlook.

Nevertheless, the dollar’s immediate path is certainly in more doubt than it was just a couple of weeks back. A final note on that is to say that the current price dynamics are not actually about the dollar itself, they are more about the aforementioned counterparty currencies, with the immediate focus right nowon the GBP and the EUR.

Important economic releases and events due this week

22/10- 1.30pm Canadian August Retail Sales

24/10- 9.00am Norway- Norges Bank Monetary Policy Decision

             (Consensus- No Change Expected)

24/10- 12.45pm Eurozone ECB Monetary Policy Decision

             (Consensus- No Changes Expected)

24/10- 1.30pm Post ECB Policy Decision Press Conference

24/10- 1.30pm US September Durable Goods Orders

24/10- 2.45pm US October Manufacturing PMI

25/10- 9.00am German October IFO Business Climate Index