Dollar ended the week as the second weakest major currencies as traders cautiously await next week's FOMC meeting. Fed will most certainly keep policies unchanged. Markets are generally anticipating a September rate hike from Fed but there is low expectation on guidance on the timing. The main focus would indeed be Fed's updated economic projections and vote. Recent data from US were generally positive, pointing to a solid rebound in Q2. The revisions in economic projections will give much hints on how confidence the Fed is regarding the sustainability of the rebound. And, that such projections would start will have a notable impact on the rate path beyond the first hike. Meanwhile, the case of September hike would start to be solidified if one or two Fed hawks start to vote for rate hike in the meeting. So far, investors seemed to be unwilling to bet on either side yet.
Such sentiment could be seen in both dollar index and stocks. The dollar index's rebound from 93.13 was limited at 97.77 and spiraled downward since there. There is no clear buying momentum to finish off the consolidation pattern from 100.39. Base on the structure of subsequent price actions, fall from 97.77 could either be a correction to rebound from 93.13 or part of the pattern from 100.39, with equal probability. Thus, there is room for some downside in the dollar index and a breach of 93.13 cannot be ruled out. But overall, we'd expect 38.2% retracement of 78.90 to 100.39 at 92.18 to hold to bring up trend resumption eventually. In other words, while the trend is still bullish, we could see another month or two of sideway trading in the index, with some near term down side risk. From a short to medium term trading strategy point of view, it's not advisable to short dollar, nor chase rebound. Instead, buy dollar on dip is a more sensible choice.
The reluctance to commit to a side could also be seen in stocks. While the outlook of DJIA is getting a bit bearish, last week's fall was contained at 17714.97 support by 17733.12 and rebounded. Nonetheless, subsequent rebound was held by 55 days EMA and the index fell on Friday to close at 17898.84. We maintain our view that rise from 15855.12 was a terminal triangle finished at 18351.36. And we'd favor deeper fall to 38.2% retracement at 17397.79 next in near term. That would means the markets are finally certain on Fed's rate hike and stocks would then enter into a corrective mode. But just like the dollar index above, the current uncertainty could drag on and we might indeed see more sideway trading in DJIA before the trend finally reverses.
Another development to note is the surprising resilience in Euro in spite of the endless drama in Greece. It's reported that IMF abruptly abandoned the negotiation with Greece while Eurozone officials are starting to conduct worse case scenario analysis of a Greek default. The uncertainty on whether Greece would finally reach an agreement with international creditors and unlock EUR 7.2b in bailout funds is high. However, reactions in Euro implies traders were indeed quite confidence that Greece will have the problems sort out. EUR/USD held in tight range below 1.1379. EUR/JPY traded sideway below 141.04 while EUR/AUD just had a shallow pull back from 1.4767. And EUR/CAD also stays well inside a near term rising channel, with pull back from 1.4159 having a corrective structure. Thus, it's not advisable to sell Euro before the Greek negotiation concludes.
Regarding trading strategies, we're holding on the AUD/USD short, with stop at 0.7850. Also, we're holding on to EUR/AUD long, with stop at 1.4300. We'll stay away for new positions for the moment and wait for FOMC first.