- Longer-term charts suggest caution on USD
- GBP/USD could be due a rebound
- U.S. economy starts to slow
- Powell expected to strike cautious tone at Jackson Hole
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The Dollar's run higher could be about to reverse warns analyst Karen Jones at Commerzbank in a technical finding that comes just as fundamental reasons to ease back on the U.S. currency start to emerge.
Jones, who heads the bank's fixed income and foreign exchange technical analysis team, says "technically, the US Dollar is in the embryonic stages of reversal."
The call comes at a time of strong Dollar outperformance that at one point last week saw it claim the mantle as the best performer amongst the world's ten largest freely traded currencies.
But, could a recent surge in the Dollar signal a last hurrah for the trend?
Jones has taken a look at the long-term charts (weekly and monthly) in an effort to stand back from the recent short-term noises in order to give a sense of where the bigger trends might lie.
"Yes there is more work to be done, but failure moves higher by USD/CAD and USD/SEK and rebounds form the 55-week ma on GBP/USD, not to mention a potential reversal pattern on EUR/USD, imply weakness for the US Dollar going forward," says Jones.
Looking at the Dollar index - which captures the Dollar's performance against a basket of major currencies - reveals a failed challenge of the March high at 93.44:
"This adds weight to the idea that this was only a correction and the Dollar is back under pressure," says Jones.
Jones is meanwhile alert for a reversal in the Euro-Dollar exchange rate, which would exert a sizeable force on other Dollar exchange rates:
"Last weeks low was not confirmed by the weekly RSI and it has a huge band of support 1.1600/1.1450. We are alert to the idea of recovery from this zone. We note the potential falling wedge reversal pattern," says Jones.
And, finally, a look at the Pound-to-Dollar exchange rate's long-term chart tells Jones that a bounce might be due:
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GBP/USD has "sold off to major support at 1.3592/71 and we look for some profit taking/bounce from here. This is where the 55-week ma, the 23.6% retracement (of the move 2020-2021) and the July low are all located," says Jones.
Early indications of exhaustion in the Dollar's technical setup coincide with an important juncture in the fundamental narrative influencing the Dollar.
The Dollar's strong run has faded this week in tandem with expectations for slowing U.S. economic growth as the Delta variant of Covid tempers activity in the world's largest economy.
The Dollar has long benefited from U.S. economic exceptionalism, and signs that this exceptionalism might be waning could undermine support for the Dollar.
With this in mind, take note of an address by Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium, scheduled for Friday.
He is expected to address the issue of the Federal Reserve's planned withdrawal of stimulus, more specifically the reduction in the scale of the quantitative easing programme.
The strength of the U.S. economic rebound over 2021 means that the ultra-supportive monetary settings at the Fed are no longer required, and if anything they risk creating asset bubbles that could destabilise the economy in the future.
Expectations are that Powell will signal that a decision on 'tapering' quantitative easing will be made at an upcoming Fed meeting, an expectation that has largely been supportive of the Dollar over recent weeks.
But, Powell might also sound a word of caution on the economic outlook owing to the spread of the Delta variant of Covid, a development which could take some heat out of the Dollar.
"EUR-USD and GBP-USD continue to remain on the sidelines ahead of Mr. Powell’s virtual speech on Friday, amid talk that the Fed Chair may not sound as hawkish on the tapering front due to the pandemic, which remains a negative prospect for the greenback in the near term," says Roberto Mialich, FX Strategist at UniCredit in Milan.
U.S. consumer sentiment data for August showed a move back below pre-pandemic levels, falling to its lowest mark since December 2011.
Retail sales meanwhile fell more than expected in July, both including and excluding auto sales.
PMI data from IHS Markit out on Monday meanwhile showed U.S. private sector growth slowed sharply in August, as supply chain and capacity constraints continued and the variant added a new negative into the mix.
The data of late has showed a slowing and this will likely be acknowledged by Powell; so while the economy is still growing there is less urgency at the Fed to bring forward the timing of its tapering and this could offer a reason to unwind recent Dollar strength.
"Recent rise in delta variant cases and growth concern could delay the timing of the announcement," says Shinichiro Kadota, FX Strategist with Barclays.
"We see less of a need for the Fed to send a strong hawkish message during the symposium after the recent string of US data misses, which could bring some respite to the USD rally," adds Martinez.