After staying cautious for most of the week, risk sentiments were turned on again towards the end, bringing DOW and S&P 500 to new record highs. Aussie, Kiwi and Sterling staged a strong come back while Yen and Swiss Franc were deeply sold off. Yet, Dollar ended as the best performer last week, followed by Canadian, while Kiwi and Aussie were the worst performers.
As risk-on markets are expected to follow, at least for the near term, we’d expect commodity currencies and Sterling to continue regain last week’s lost ground. At this point, Dollar would probably turn mixed, with downside floored by buying against Yen and Euro. With Europe now in its third wave of the pandemic, Euro would likely stay vulnerable for a while.
DOW, S&P 500 hit new records after completing brief pull back
DOW’s retreat was contained by 32009.67 resistance turned support last week. Subsequent strong rally on Friday, and the close at record high of 33072.88 reaffirmed near term bullishness. Break of 33227.78 resistance will resume both the trend from 26143.77 and 18213.65. It’s a bit far, but we’d tentatively put 100% projection of 18213.65 to 29199.35 from 261143.77 at 37129.47 as next medium term target. And in any case, near term outlook will continue to stay bullish as long as 32009.67 support holds.
S&P 500 also closed at new record high after drawing support from 55 day EMA and rebounded strongly. Rise from 3233.94 and up trend form 2191.86 should be ready to resume. Next near term target is 61.8% projection of 2191.86 to 3588.11 from 3233.94 at 4096.82. Reactions from this projection level would help near determine the chance of DOW hitting the above mentioned medium term target. In any case, outlook will stay bullish as long as 3723.34 supports in SPX.
Dollar index extended rebound from 89.20, still seen as a correction
While Dollar weakened notably against Sterling and commodities towards the end of the week, Dollar index was not too bothered by this round of risk-on trades so far. Selloff in Euro and Yen is keeping the the index afloat. DXY resumed the corrective rebound from 89.20 to close 92.76. Further rise is expected as long as 91.30 support holds. Still, DXY needs to take out 55 week EMA (now at 93.42) to indicate that it’s ready for a bullish trend reversal. Otherwise, we’d still treat the current recovery as a corrective move, with medium term outlook staying bearish.
Euro vulnerable against Sterling, Aussie and Loonie
The development in DXY is in line with the bearish development in Euro in crosses. EUR/GBP’s consolidations from 0.8537 looks completed. Firm break of 0.8523/7 support will confirm and extend the larger decline from 0.9499 to wards 0.8276 key long term support.
Similarly EUR/AUD’s consolidation from 1.5250 could have also completed too. Immediate focus will be on 1.5250 support this week. Firm break there will resume larger decline from 1.9799. Next target is long term fibonacci level of 61.8% retracement of 1.1602 to 1.9799 at 1.4733.
EUR/CAD should also be ready to retest 1.4790 support this week. Break there will resume whole fall from 1.5978 to 161.8% projection of 1.5978 to 1.5313 from 1.5783 at 1.4707. There is prospect of further decline to 1.4263 long term support, if 1.4707 could be decisively taken out.
GBP/JPY’s strong rebound last week suggests that pull back from 152.52 has completed at 148.50, ahead of 148.09 cluster support ( 23.6% retracement of 133.03 to 152.52 at 147.92) as expected. Initial bias is mildly on the upside for retesting 152.52 high first. Break there will resume whole up trend from 123.94. Next target is 156.59 long term resistance. In case the consolidation extends with another fall, we’d continue to expect strong support from 147.92/148.09 to contain downside and bring rebound.
In the bigger picture, rise from 123.94 is seen as the third leg of the pattern from 122.75 (2016 low). Next target is 156.59 resistance (2018 high). Sustained break there should confirm long term bullish trend reversal. On the downside, break of 142.71 resistance turned support is needed to be the first sign of completion of the rise from 123.94. Otherwise, outlook will remain bullish even in case of deep pull back.
In the longer term picture, the strong break of 55 months EMA (now at 143.95) is an early sign of long term bullish reversal. Firm break of 156.69 resistance should now confirm the start of an up trend for 195.86 (2015 high).