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AUD/USD, USD/JPY Reverse, but USD Decline May Not be Over Yet

AUD/USD, USD/JPY Reverse, but USD Decline May Not be Over Yet

Christopher Vecchio, CFA,

Talking Points:

- AUDUSD consolidating in a new, ST symmetrical triangle.

- EURUSD slipping back; ECB next week may try to limit gains.

- See the October forex seasonality report that favors US Dollar weakness.

Data has been disappointing for the US Dollar overall, even if yesterday's jobless claims and US CPI figures helped lift the buck. In fact, yesterday's data beats were 'so good' relative to recent trends that the US Citi Economic Surprise Index, a gauge of near-term data momentum (basically, does the actual data come within two standard deviations of the aggregate forecasts), jumped from -26.7 to -18.5;this is the first time since September 11 that the CESIUSD is back above -20.0.

So while the data may have proven a bit shocking (in a good way in the short-term for the US Dollar), it doesn't do much for the most important theme impacting the market: the timing of the Federal Reserve's first rate hike. As it stands, various gauges of markets are pricing in the first rate hike somewhere between March 2016 (Fed funds futures contracts, below) and July 2016 (Eurodollar options).

Fed funds rates

Before we can declare that the US Dollar's turnaround the past 24-hours is having any meaningful technical progression, there are a few conditions that need to be met. First, technically speaking, the USDOLLAR Index needs to clear its most recent intraweek swing high near 11972 in order to end the series of lower highs and lower lows from the past week.

Secondly, the US Dollar needs those market measures of Fed rate timing to turn around. In early-August, the probability of a Fed rate hike in October was seen as nearly 50%; now it is only 6%. Any indication by these market measures that a rate hike in 2015 is a real possibility - now seen as only a 30.5% chance of happening - could prove to be a big boon for the greenback amid what should be a flurry of central bank activity next week.

See the above video for technical considerations in EURUSD, GBPUSD, AUDUSD, USDJPY, and the USDOLLAR Index.

Read more: Retail Crowd Positioning Shifts Keep Focus on US Dollar Downside

--- Written by Christopher Vecchio, Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.