The US dollar was one of the beneficiaries following the initial Brexit turmoil which saw the greenback gaining on safe haven flows. While we await the latest institutional position which will be released later this evening from the CFTC, the positioning after the Brexit outcome will be an interesting read, considering that rumors have surfaced that the Fed could slide back into a policy easing mode. Data from last week, for the week ending June 21st and released on Friday, June 24th showed that the aggregate USD long positions remained at a comfortable $8.7 billion.
In our previous US dollar index analysis titled “US dollar looking vulnerable to 93.00“, published on June 17th we pointed out that the buck could likely fall back to the 93.0 – 92.50 level once again to establish support. While the US dollar index did not slide back to 93, it did manage to establish support, reversing off June 23 lows near 93.02 and closing at 93.32. Thereafter, following the surprise Brexit verdict, the dollar shot up strongly on the day, closing at 95.67. Since Monday, the dollar index has been sliding lower, but at the same time, the bullish signals are all around.
US Dollar Index – The chart we’re watching
Firstly, the chart below shows prices breaking out of the sliding price channel. Although not a nearly perfect pattern, the inverse head and shoulders pattern is quite evident as the price fell to lows of 91.88 in early May followed by the June’s right shoulder low at 93.02. The resulting breakout has now seen the US dollar posting a somewhat bullish flag pattern, which could signal further upside.
Initial support is seen at 95.95 – 95.75 followed by lower support at 95.0 – 94.75. A bullish follow through above the first support with a breakout above 96.55 which marks the bull flag’s high could signal a longer term rally that could see 97.45 followed by 98.55 levels being marked as the minimum price objective here. The bullish view could, however, turn weaker in the event that the dollar index slides to 95.0 – 94.75 to mark a retest of the H&S and price channel breakout level. In such a scenario, US dollar will be likely struggling to breakout above 95.95 – 95.75 which could potentially turn to resistance and put the bullish view into question.
Factors that could impact the US dollar in the near term
- Today’s ISM manufacturing report will be an important data point to consider. Expectations are for the ISM manufacturing index to remain at 51.3, same as in May. As long as there are no downside surprises, the dollar could remain well supported
- Next week’s NFP report will be the big data point of interest that could either bring the Fed rate hike bullish bets back on the table or could potentially cement the view that Fed will stay off hiking rates until December
- So far US economic data has remained broadly positive in April and May, with the exception of the May’s jobs report. AtlantaFed’s GDPNow model tracks Q2 GDP growth at 2.70%, a strong rebound from Q1’s 1.10% GDP growth. Still, it is lower than 2015’s Q2 GDP growth of 3.90%, 2014 Q2’s GDP growth of 4.60% and 2013 Q2 GDP growth of 3% which makes quite a case for the rate cut camp.
- The Federal Reserve could remain on the sidelines in July (26 -27) which is not accompanied by any press conference. However, September (20 – 21) could be an important month for the Fed as the central bank will have enough data to assess the economic growth and also look into Q2’s data by then. So the best case for a Fed rate hike if supported by data, could come in September, or the Fed could potentially sit on its hands until December.