Weekly Review And Outlook: Dollar Boosted By Hawkish Fedspeaks Again
ActionForex | May 16, 2016 05:46AM ET
Dollar surged broadly last week as hawkish comments from some Fed officials revived talks of rate hike in June. The greenback was further supported by some positive economic data including retail sales. Dollar index jumped to close at 94.60, affirming the technical view of trend reversal. However, it should be noted that fed fund futures maintained the pricing of very slim chance of June hike, at only 4%. Considering the continuous job growth in spite of April's disappointment, and more importantly, strong wage growth, it could be the markets who were behind the curve regarding Fed's rate path. Nonetheless, it should also be pointed out that Fed is facing some important risks in the financial markets, including a reversal in US stocks, extended weakness in China's stocks and economy. In particular, the highly anticipated EU referendum in UK will be held on June 23, a week after next FOMC meeting on June 15. There are still more reasons for Fed to hold than hike in June.
But after all, dollar is enjoying a strong rebound and the developments affirm the case of trend reversal. As noted before, dollar index's choppy fall from 100.51 should have completed at 91.97, after drawing support from 38.2% retracement of 78.90 to 100.39 at 92.18, on bullish convergence condition in daily MACD. Further rise is expected this week for 95.19 resistance first. Firm break there should confirm this bullish case and would target the upper end of medium term range at 100.51. However, break of 93.68 will dampen the bullish view and turn focus back to 91.91 low.
DJIA attempted to recover ahead of 55 days EMA last week but failed well below 18167.63 high and dipped again. Initial bias is back on 17484.23 support this week. Firm break there would confirm near term reversal. The index is staying in a medium term sideway pattern from 18351.36 historical high. Sustained trading below 17484.23 could pave the way back to lower side of the range at 15450.56. In case of another rise, we'd be cautious on loss of momentum again as it approaches 18351.36.
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We talked about the risk of resumed weakness in China stocks last week. The SSE (LON:SSE) composite did open sharply lower and dipped to as low as 2781.23 before stabilizing. Risk will remains on the downside in the index. As noted before, corrective rise from 2638.3 has completed at 3097.16 after hitting 38.2% retracement of 3684.56 to 2638.30 at 3037.97. Further fall would be seen in near term to retest 2638.30 at least, with chance of extending the larger down trend through this low. Such development would likely pressure Aussie and Kiwi further.
Regarding trading strategies, we entered NZD/USD short on break of 0.6757 support last week. Selling momentum was weak so far but we'll hold on to the short term situation with expectation of further weakness in China and strength in dollar. We'll put a stop at 0.6850 nonetheless.
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