The technical condition of the US dollar, which has been advancing through most of the Q4 16, has been deteriorating in our assessment. This led us to anticipate a consolidative or corrective phase. Although the holiday-thinned market conditions may have spurred exaggerated price moves, like the euro ahead of the weekend, it now appears that this phase is set to continue.
We have argued that the dollar rally was part of a larger portfolio adjustment that began in early October, with the US election providing extra fuel to a move that was already underway. For example, the anticipation of the hike by the Federal Reserve at the December FOMC meeting was building before the election, and most data was stronger than expected, lifting the economy to something close to two-times trend.  The broader changes in the investment climate included bearish curve steepening, rising equities, higher oil, and lower gold prices. Markets may move at different speeds, but dollar’s pullback is likely part of a larger correction to the powerful Q4 16 moves.
In the last trading session of 2016, the Dollar Index slipped through its 20-day moving average (102.15) for the first time in a couple of weeks, but managed to close just above it (~102.20). It could have put in a third point in a trend line that connects, the November 9 (~95.90), December 8 (~99.45) and December 30 low (~101.95). Nevertheless, the technical indicators remain bearish. The Dollar Index has been stalling.  Consider the highs from the past three weeks, 103.56, 103.65 and 103.63. The week’s 0.8% loss snaps a three-week advance. Last week, we suggested the potential of this pullback extends to 101.00-101.50.  This still seems reasonable at this juncture, though the risk is over an overshoot to the downside.  The 100.70 area may be key for the outlook for Q1 17.
The euro spiked briefly through $1.0650 on the last trading session of the year. Although this proved premature as the euro quickly surrendered the gains, the near-term outlook is constructive. The fading upside momentum in the Dollar Index was matched by the euro, its largest component. The euro’s lows from the last three weeks are $1.0367, $1.0352, and $1.0372. The MACD and Slow Stochastics have turned up, and the five-day moving average is set to cross above the 20-day average in the coming days. Last week, we suggested potential toward $1.0675, but the way the correction has unfolded, it looks like there is scope for gains beyond there. The $1.0715 area represents a 38.2% retracement of the euro’s gains since the US election. The 50% retracement objective is near $1.0825.Â
