Inconsistent Dollar Could Breakout Or Reverse, NFP In Focus

FOMC minutes showed broad support for the taper of asset purchases by the Fed, but the US news on Wednesday failed to break out with a retracement overnight instead in some key European pairs. Thursday has the ECB and the Bank of England as risk events so the market will be looking for clues of backtracking slightly on forward guidance or slight movement of the goalposts due to unexpected over-performance from the UK economy. Neither seem likely at this stage, although there may be comments suggesting that these things are a possibility, which would cause the same reaction regardless. The ECB are unlikely to change the minimum bid rate again at this meeting so there seems less event risk there and Draghi has his performance now polished so it will be difficult to get anything out of him that he didn’t intend to portray. Both central banks are expected to talk about recoveries but also remain cautious of downside risks.

Overnight Chinese inflation data showed a slowdown, which has impacted on the Australian dollar and pushed it lower. This could also provide a slightly risk-off tone for the day in what is likely to be a wait and see until Friday’s key Non-Farm payrolls release

USD% Index

The USD% index has now tested the triple top high and retraced mildly which suggests a further push for another test before a breakout if NFP is good, however once again the direction in the medium term is dependant on the NFP data impressing, with this also being a perfect place for a reversal lower again for the dollar. RSI remains above the 100 period moving average and is looking more bullish which supports the assumption of further dollar strength should the data play ball. RSI also suggests that should a break to the upside occur there would be a decent amount of headroom above and also that any reversals won’t get too out of hand before becoming oversold, with a wide range-bound situation the most likely in that event. I remain bullish USD although this is NFP dependant

USD% Index Resistance (EUR/USD support): EUR/USD 1.3589, 1.3571
USD% Index Support (EUR/USD support): EUR/USD 1.3600, 1.3617

EUR% Index

Of interest on Thursday morning is the retracement back above trend line support following a reasonable break below. Although a little unusual in terms of price action, there was talk of right hand side fix interest in EUR/GBP for the 9am fix which could have been the source of the unexpected EUR strength. As such the outlook remains bearish with the expectation that we will test the bottom of the bullish channel pre-NFP and a break though to the downside if the number is good or a rally from support if the number is bad. I remain bearish EUR

EUR% Index Resistance: EUR/USD 1.3650, 1.3700
EUR% Index Support: EUR/USD 1.3581, 1.3490

JPY% Index

Still contained by the less steep bearish channel even though the Nikkie performed relatively poorly overnight in the Asian sessions suggests a reluctance to buy Yen from these levels yet. As such a further painful creep lower seems the most likely event for the JPY% index. 105.80 is now a significant resistance for USD/JPY although at the current rate of descent for the JPY% index, it may take a while to get there. The slow pace of the drop may make a double bottom a possibility for a minor recovery higher for the index, which again is supported by the price action in the Nikkei.I am bearish JPY although we may be nearing a minor reversal

JPY% Index Resistance (USD/JPY Support): USD/JPY 104.50, 104.00
JPY% Index Support (USD/JPY Resistance): USD/JPY 105.10, 105.80

GBP% Index

Still holding high after the resistance to dollar strength on Wednesday, the pound began selling on Thursday morning following some demand for EUR/GBP. Carney may suggest the possibility of a threshold shift before a reduction in rates will be considered as widely speculated in the financial press, although this is not without an element of egg-on-face for the BOE’s forecasting performance and we are still a way off before he is backed into a corner on this, so a no change on policy is expected. Still looking overpriced a correction lower could still occur although it will likely faire better than it’s European peers in this respect should we get a dollar breakout. I am bearish GBP

GBP% Index Resistance: GBP/USD 1.6475, 1.6500
GBP% Index Support: GBP/USD 1.6387, 1.6350

AUD% Index

A drop lower following poor Chinese CPI has dropped us to the bottom of the possible bullish channel and it remains unclear if this support will hold at this stage. Interestingly though given the selling mania that we observed late last year, we have yet to hit a new low. It seems possible that a recovery could still happen although the this could merely come in the form of a mild rally from this point before dollar strength on Friday pushes us back lower again. A poor NFP could make long AUD/USD very attractive. I am neutral AUD

AUD% Index Resistance: AUD/USD 0.8346, 0.9000, 0.9019
AUD% Index Support: AUD/USD 0.8874, 0.8845, 0.8767

CHF% Index

A minor false break for the CHF% index has seen us push back inside the wide bullish channel, which interestingly could be a function of a topping EURCHF (shown at the bottom) in conjunction with the price action of correlation the EUR% index. As such the CHF will no longer be a favourable short over EUR and may see further consolidation without a breakout until the outcome of NFP is known I am neutral CHF

CHF% Index Resistance (USD/CHF support): USD/CHF 0.9050, 0.9000
CHF% Index Support (USD/CHF resistance): USD/CHF 0.9100, !! 0.9109 !!, 0.9150, 0.9200