FX focus: dollar hesitates ahead of key resistance

The dollar is on everyone’s mind today, after a stunning 3.5% rally since July, the dollar index is taking a breather ahead of key resistance at 82.67 – the high from September 6th. In the short term, =we wouldn’t be surprised if we get below this level as the dollar index looks a little over-extended to the upside, we still think that any pullback will be short lived. Key support levels include:

• 81.73 – the 61.8% retracement of this month’s advance

• 81.18 – August 1st low.

However, last week’s break above 81.51 – the 61.8% retracement of the July 2013 – May 2014 bear trade, was a bullish development and we think any pullback will be short lived as the dollar’s pillars of support remain firm including:

1, Rising 2-year bond yields, which have room for further upside. As you can see in figure 1, the short –term yield spread between the US and Germany is dollar positive.

2, Improving USD fundamentals – watch out for a stellar durable goods report later on Tuesday, the July data could be in the double figures although most of this could be due to airline orders.

3, The Eurozone: EUR is the second most traded currency in the world, and when it is struggling it can be good news for the buck. The fundamental picture is looking bleak for the single currency right now, the French government has been dissolved as divisions rise as France tries to re-boot its economy and embark on an austerity programme, and the ECB may have no choice but to embark on QE at its meeting next week if inflation for August falls to 0.3%, as the market expects.

If we can break above 82.67 resistance then we could see back to July 2013 highs, just below 85.00.

The EUR view:

As we mention above, the performance of the EUR can be critical for the dollar. EURUSD is extending its recent decline, and there is potential for further downside in the near term with supports at 1.3105, the September 6th 2013 low, and then 1.3038 – the 50% retracement of the July 2012 – May 2014 bull trade. Below here would open up the prospect of life below 1.30 – the lowest level since July 2013.

Conclusion:

• The dollar may be pausing for breath today, but we continue to think that momentum is to the upside, especially if the EUR continues to come under pressure.

• 82.67 – the high from Sept 2013 – is key resistance in the dollar index. Above here opens the way to July 2013 highs just below 85.00.

• If the EUR continues to come under pressure that could boost the buck.

• In EURUSD, watch 1.3105 then 1.3038 – key support levels in the near term.