Is This the Start of a Dollar Rally?

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Market Drivers August 22, 2017
UK PSNB bit better
ZEW Sentiment sours
Nikkei -0.05% Dax 0.55%
Oil $48/bbl
Gold $1290/oz.

Europe and Asia:
GBP UK PSNB -0.76B vs. -0.2B
EUR ZEW 10 vs. 15

North America:
CAD Retail Sales 8:30

The dollar showed first signs of life this week as the single currency rallied across the board in Asian and European trade rising against all of its major economic partners.

USDJPY rallied to a high of 109.45 but the move petered out ahead of the key 109.50 level and the pair settled at 109.30 my mid-morning London dealing. There is no key US economic data on the calendar today but the greenback appears to have found a bottom ahead of the Jackson Hole symposium which will take place at the end of the week.

We noted recently that the 108.50 is a key hold level for USDJPY and after yet another test yesterday the pair has bounced once again and looks ready to stage a short covering rally as traders position themselves for more central bank policy divergence as Jackson Hole with Ms. Yellen expected to maintain the hawkish rhetoric while Mr. Draghi is likely to remain more circumspect about any immediate tightening plans.

With dollar seemingly stabilized the greenback bulls found some solace in weak German ZEW data which showed that the sentiment portion of the survey printed at 10 versus 15 eyed and 17.5 the period prior. The ZEW institute noted that “significant decrease of economic sentiment indicator reflects a high degree of nervousness over the future path of German growth and that weaker than expected exports and widening emissions scandal have helped contribute to this lack of confidence”. However it also added that “outlook for Germany still remains relatively stable at fairly high levels.”

The euro faded to a low of 1.1763 in the wake of the news but remains above the 1.1750 support for now. Still, any further dollar buying is likely to push the pair below that level as profit taking flows are starting to build. After a massive rally for most of the summer, the pair has stalled at the 1.1800 level for all of August and now looks ready to correct towards the 1.1600 level.

With no major US data on the docket the FX trade today will be centered on technical flows with dollar longs looking to press their early advantage in Asia and Europe. If they succeed 109.5 to the topside in USDJPY 1.1750 to the downside in EURUSD and 1.2800 to the downside in GBPUSD should all give way as the day proceeds.

Boris Schlossberg
Managing Director

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