US Dollar Off the Lows, but Has Yet to Bottom
- Volatility in FX markets likely going to be the highest on Friday this week, when we'll hear from both ECB President Mario Draghi and Fed Chair Janet Yellen.
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The US Dollar (via the DXY Index) has traded sideways for the better part of the past week, breaking the downtrend from late-June but, thus far, has also failed to establish a convincing bounce off the lows. GBP/USD's bearish rising wedge continues to develop, but EUR/USD resiliency and USD/JPY weakness have held back the DXY Index thus far.
Going into the Jackson Hole Economic Policy Symposium between Thursday and Saturday, it appears there is a small opening for the US Dollar to gather some policy momentum to carry it higher versus its major counterparts, particularly the Euro (and given that the Euro is 57.6% of the DXY Index, this could have implications for the US Dollar bottoming process).
Ahead of time, it looks like ECB President Draghi’s upcoming speech at the Jackson Hole Economic Policy Symposium will be a case of ‘buy the rumor, sell the news’ after developments last week. While the July ECB meeting minutes didn’t offer new insight into recent market developments, a leak on Tuesday started to shape expectations for ECB President Draghi’s speech this coming Friday. Indeed, as we’ve speculated in recent weekly trading forecasts, it finally appears that the ECB may be starting to become concerned with persistent Euro strength.
Accordingly, the key resistance that we outlined a week ago as being a necessary precondition for the DXY Index to clear before we can say the US Dollar has bottomed remains in place: the July 26 outside engulfing bar swing high at 94.29.
Only at this point, the series of 'lower highs and lower lows' since the end of June would be broken, and in context of sentiment and positioning (which according to the CFTC's COT report, is the most bearish US Dollar six years), would suggest that we've seen the exhaustion low.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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