3rd June - Dollar strength and Euro weakness
06 June 2016
TECHNICALS:
MONTHLY Dollar euro chart:
The market has been going sideways for a year and two months – pinned beneath the 1.18/20 band of resistance.
But note the importance of the 1.01 level.
That is support from two diagonals: one falling and one rising.
But if that level broke, there would be no support until 0.8437 and then 0.7033.
Daily Dollar Euro chart
There no doubt that the Dollar’s recent strength has been impressive but not so much so that the market has broken the channel from early December.
Yet.
The critical breakout point is the diagonal just beneath the market at 1.1 or so.
A break of that and the Euro bears would excited.
FUNDAMENTALS:
The recent Dollar rally, especially against the Euro, has got the Dollar Bulls excited once more. But a close look reveals the Dollar hasn’t even made it back to the levels it was range trading around even a few months earlier. So should we see the current move as just a brief correction or is the Dollar set for a meaningful rally?
The Dollar’s period of weakness against the Euro began almost immediately after the Fed delivered its first rate hike in December 2015, almost immediately after they moved policy, US data turned weak, and as the months rolled on the Fed adopted a dovish tone which seemed to push any further hikes back into 2017.
But US data has turned the corner and although the US economy is yet to pick up speed, the Fed is again confident it will. Indeed, last week’s New Home sales report was the strongest since before the financial crisis and if today’s non-farm payroll report meets or beats consensus the Fed will judge it sees enough evidence to hike rates.
This change of stance over recent week’s has fed directly into the Dollar and the US currency has strengthened against the Euro and the Yen. Assuming the Fed delivers the rate hike markets now expect, how much further can the Dollar go?
It is important to remember the Fed is going to move in small and gradual steps meaning policy may not hit 2-2.5% until two years time, but what is important for the Dollar is, the Fed is hiking rates when the ECB is still actively engaged in a QE program, with to date, not too much to show for it.
Then there is the mater of the looming “BREXIT” vote!
We doubt the outcome of the vote is very important for the US economy, but it is for currency markets.
Clearly a vote for the UK to remain in the UK, will likely see the Pound strengthen against both the Dollar and Euro, but it will also shift the spot light away from the UK and firmly onto the Euro zone, meaning traders will be focused on the failings of the Euro zone economy and the limited results the ECB has to date achieved through its monetary policy, meaning the Dollar would likely rally against the Euro.
But what if the UK votes to leave the EU, what are the implications for the Dollar then? We judge it still rallies.
It would rally against Sterling for obvious reasons, the biggest of these being uncertainty and how much damage the UK economy would suffer. But what of the Euro?
We judge a UK exit from the EU could be negative for the Euro against the Dollar since it would likely open up a whole debate within several other EU countries about the worth of EU membership, and although mainstream politicians would look to close ranks, there are movements in many countries, including Germany that are unhappy with the EU and do question continued membership.
Clearly, if those movements gained traction and their voices began to be listened to, the Euro would come under pressure, especially against the Dollar.
In summary, we judge the current strengthening of the Dollar is the beginning of a new bull move and there are plenty of reasons that argue in favour of going long the Dollar, especially against the Euro.
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10th June - We still think the S&P is hot 
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20th May - The Dollar is set to gain strength