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Charting the post-NFP dollar decline

In the wake of a batch of largely disappointing US employment numbers, the dollar has come under pressure. However, amid a wider trend resurgent dollar story, what signs would we need to prove that further strength is yet to come?

US flag
Source: Bloomberg

Friday's jobs report proved that August remains a sticking point for US employment, with the payrolls, earnings and unemployment rate all falling short of expectations. The upshot of this appears to be that markets expect to see a more patient and thus dovish Federal Reserve, with the likeliness of a September hike now falling to 36%. With that in mind, it is worthwhile understanding where this leaves dollar expectations and where we think the dollar will be going in the short and longer term.

The weekly dollar index chart highlights the fact that we have been caught within a circa 900-point range since the turn of 2015. Price is currently within an ascending phase and this, accompanied by the bullish entry, provides us with a clear bullish bias when looking into shorter term price action. This week has seen the dollar take a hit, off the back of Friday’s weak US jobs report, yet it is clear that we are in the ascendancy following a pullback to the 76.4% retracement last month. 

Weekly dollar index chart

On the daily timeframe it starts to get more interesting, with a clear ABC correction having been completed into the same Fibonacci retracement as that seen in June. This points towards another leg through 97.62. The most important signal that this is going to happen would be a break through 96.48, providing a new higher high, off the back of a new higher low on Friday.

We have not seen that yet and as such, there is always the threat of another leg lower to continue the pattern since late July. However, with price in the ascendancy from the weekly range bottom, alongside the retracement into trendline and Fibonacci support, there is reason to believe we will see another leg higher before long. Of course, the notion that we will not see the Fed raise rates in September will be a knock, yet they will begin to raise rates before long and this is likely to feed back into the dollar once more soon enough.

Daily DXY Chart

It is worthwhile noting that the dollar index is made up as follows:

  • 57.6% Euro (EUR)
  • 13.6% Japanese yen (JPY)
  • 11.9% Pound sterling (GBP)
  • 9.1% Canadian dollar (CAD)
  • 4.2% Swedish krona (SEK)
  • 3.6% Swiss franc (CHF)

With this in mind, it makes sense to look at EUR/USD in the same manner and when observing the weekly chart, it bears a striking resemblance to the dollar index, but in reverse. We appear to be on the descending phase and despite recent dollar weakness association with a delay to the rate rise procedures, we have seen little resulting upside in EUR/USD.

Weekly EUR/USD chart

Much like the dollar index, we still have a key hurdle to overcome in order to signal that we are indeed likely to break to a new low below 1.0911. That is the ability to move back below 1.1046, which would establish a new lower low and confirms the recent peak (1.1366) as a new lower high on the wider timeframes. The threat here is another bounce from this 76.4% support (1.1122) and as such, it will be key to see how this one plays out.

Daily EUR/USD chart

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