Dollar staged a comeback last week as boosted by stronger than expected core inflation reading as well as Fed chair Janet Yellen's speech. The 0.3% mom rise in core CPI in May was the strongest gain since January 2013 and was seen as a sign that inflation is finally climbing back to Fed's target. Meanwhile, Yellen said in a speech on Friday that it's "appropriate at some point this year" to start hiking interest rate from the current near zero level if the economy improves as she expected. That's seen by economists as a sign of Fed's determination to act this year even though the hike would just be a symbolic one. She also reiterated the conditions for rate hike, including "continued improvement in labor market" and confidence that inflation will "move back to 2% over the medium term". Yellen was also optimistic that the US economy "seems well positioned for continued growth" as cheaper energy prices gave consumers better purchasing power.
Regarding the timing of the rate hike, FOMC minutes for April meeting basically affirmed that June is ruled out. More in Fed Unveiled Rate Hike In June Unlikely. The general consensus remained that September is the timing for the first hike. Nonetheless, we'd also like to point out the risk that Fed could further delay the hike if the economy doesn't rebound as expected in Q1. The upcoming data would continue to drive adjustments in the expectations and thus dollar as well as other risk markets.
Technically, EUR/USD's fall argues that rebound from 1.0461 has completed at 1.1466 already. USD/JPY's break of 120.50 resistance should pave the way for at least a test on recent high of 122.01. More importantly, the larger up trend in USD/JPY could be resuming for next key resistance at 124.13. USD/CAD's rebound also argues that pull back from 1.2834 has completed at 1.1919 and we'd see retest of 1.2834 in near term. However, GBP/USD remained relatively resilient as supported by positive economic data release as well as the relatively neutral BoE minutes.
The development in dollar index will be closely watched this week. Pull back from 100.39 could have finished at 93.13, ahead of 38.2% retracement of 78.90 to 100.39 at 92.18. But we'd prefer to see sustained break of 96.17 resistance to confirm. In that case, a retest of 100.39 should be seen. And the larger up trend would very likely follow after that. However, rejection from the current level would bring deeper correction to below 92.18 before completion.
Comparing other major currencies, EUR/GBP's fall from 0.7482 extended last week and break of 0.7116 support affirmed our bearish view. That is, corrective rebound from 0.7013 has completed at 0.7482 already and larger down trend is resuming for a new low below 0.7013. Despite edging higher to 136.95, EUR/JPY suffered a steep pull back. The development suggests that rebound from 126.09 might be finished on bearish divergence condition in 4 hours MACD. EUR/AUD was bounded in tight range between 1.3909/4352 and maintained a neutral outlook. But, we still prefer the case that fall from 1.5331 has completed at 1.3671 already after drawing support from a key fibonacci level and favor another rise through 1.4443 resistance. EUR/CAD's rebound from 1.3019 lost momentum after failing to sustain above 55 days EMA. The cross is so far still bounded inside the medium term falling channel and maintain a bearish outlook. At this point, even though the rebound in EUR/CAD might extend higher, upside momentum would likely be limited. Hence, the overall development argues that Euro would possibly turn to be the weakest major currency except versus Aussie.
Regarding trading strategies, EUR/AUD stayed in range and our anticipated breakout hasn't happened yet. We'll stay long with it for the moment with stop maintained at 1.39. Our EUR/JPY long strategy was incorrect. Even though the Japan yen did weakened elsewhere against dollar and sterling, it was overwhelmed by Euro's weakness. Our EUR/JPY long was stopped out at 135.00. For this week, we'd cautiously go long dollar. Firstly, we'll sell EUR/USD at market with stop at 1.12 for a test on 1.0461/0520 support zone. Secondly, we'll sell AUD/USD on break of 0.7784 support for at least a test on 0.7532 low.