Dollar Rally Extended On Strong Job Data, Sterling Shows Weakness

 | Oct 07, 2014 03:13AM ET

After struggling in consolidation for most of the week, dollar's rally took off again towards the end as boosted by strong employment data from US. The greenback ended the week as the strongest currency while yen closely followed. European majors were broadly sold off. Indeed, Sterling was the weakest major currency as data pointed to slowdown in the recovery. Also, there were talks that BoE's tightening pace could be much slower than Fed's. Euro recovered against Sterling and Swiss Franc as ECB president Draghi downplayed the target of balance sheet expansion in the post meeting conference, which triggered some short covering. Meanwhile, commodity currencies were mixed as partly supported by rebound in equities.

Technically, dollar survived the test from non-farm payroll and should maintain momentum in near term. There is still much room for the greenback to sustain it's recent rally. EUR/USD, currently at around 1.25, could head to 1.2042 key support and might only get some support below 1.21. USD/CHF, currently at around 0.96, would likely have a test on 0.9971 key resistance. GBP/USD, current at around 1.6, should target fibonacci level at 1.5721. The question is, USD/CAD is close to key resistance of 1.1278 and AUD/USD is close to fibonacci level at 0.8544. There is risk for dollar to pull back against these two commodity currencies.

Overall, the dollar index breached 61.8% projection of 72.69 to 84.75 at 86.35 last week and momentum remains strong. Based on current momentum, dollar index would likely take out 88.70 resistance. But, from a longer term perspective, the real test is 89.62 cluster resistance level, which is close to 38.2% retracement of 121.02 to 70.69 at 89.91. The strong support as seen from 55 months EMA since 2012 is certainly a sign of underlying strength. But clear break of 89.62/91 is needed to confirm establishment of a long term up trend. Otherwise, the index would just be in range trading. At this point, we'd favor an eventual break out.