Will The Light News Week Facilitate Range Trading?

Last week, we warned that dollar’s downside correction to its two-month advance was not over. It slipped further against the euro, yen, and sterling, while it strengthened against the dollar-bloc currencies. The outlook remains mixed for the week ahead, making it difficult to discuss the dollar in general.   

The Dollar Index is heavily weighted toward the complex of European currencies. Two of the US main trading partners, China and Mexico, are not even included, yet are frequently used as a broad gauge for the greenback. The recent dollar pullback saw it push through the 38.2% retracement of the rally (93.55) that began from the year’s low set on September 8 (~91.00).  

The Dollar Index finished the week marginally above the 100-day moving average (~93.65). The lower Bollinger Band is found near 93.50. The technical indicators on the daily bar charts still warn of downside risks, and the five-day moving average has fallen below the 20-day for the first time since late September. The 50% retracement is seen near 93.10. The weekly technical studies lend support to our view that the pullback is corrective in nature. 

In the middle of last week, the euro climbed to approach the $1.1860-$1.1885 area, which corresponds with retracement objectives. Also, important is that area marks the October high that was also part of a larger topping pattern. Following the mid-week reversal (shooting star candlestick) the euro had a shallow pullback, finding support at near the five-day moving average, which it has not closed below since November 8. A move below that moving average (~$1.1765) could be among the first signs to confirm that a near-term high is in place. The upper Bollinger Band is near $1.1835. The US two-year premium continuing to trend higher against Germany, which was not the case during the late April through early September euro rally, and this makes us hesitant about getting enamored with the euro.