Zak Mir – The Dollar Index Turns

For the August edition of Spreadbet magazine I chose the somewhat unlikely call of a “Buy” of the Euro vs the US Dollar when it was under $1.31, with the initial “Target” being $1.34. The peak so far has been $1.34001, hence the mention now. That it hit my target to the nose surprised even me!

However, it would appear that any further upside for this cross could be somewhat difficult given the macro setup in terms of QE tapering and the technical picture for the Euro following an August “Bull” trap above the July $1.3344 peak, and the weekly close back below this level last week. On this basis, one would be surprised if there was not now a test of the 200-day moving average currently at $1.3105 as soon as the end of next week.

The idea that the Euro has witnessed its best for the time being is also backed up by the position for the Dollar Index. Indeed, it can be seen (on the chart below) that there has been quite an emphatic set of charting signals in favour of the greenback.

They include: the way that both June and August support overlapped with former 81 zone November to January resistance; the way that the latest bounce is off the floor of a rising trend channel from December itself, and the mild support from a trend line in the RSI window.

But, perhaps the winning aspect is the way that today, so far, has witnessed a relatively sharp snapback above the 200-day moving average, in similar fashion to the bounce seen in June when this feature was below 81.50.

In fact, a couple of months back we saw this market shoot quite quickly towards the top of the late 2012 rising trend channel as high as 84.96 – as US Fed Chairman Ben Bernanke “put his foot in it” over the timing of QE, and was then forced to fudge the issue.

The likelihood now is that we will be treated to a move higher of similar magnitude to that of a couple of months back given the copycat setup, with the 85 zone being the target. There would however appear to be little reason to let any long positions here run much below 81.

Finally we turn to the Governor of the Bank of England, Mark Carney and Cable. Since he started his position on July 1^st, his presence has been overall bullish on Cable. It would probably not be too much of an exaggeration to suggest that without him, rather than positioned around $1.55, at best this cross would be well below $1.50. Not sure if that’s actually what he wanted (!) but it is a stance that SBM has been banging on about for many months now, namely that sterling is undervalued, under owned and in the process of a re-rating. The retrace to $1.5450 is a renewed buying opportunity.