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Dollar Rebounded as DOW’s Selloff Posts a Warning to Risk Sentiment

Dollar ended as the strongest one last week, with some held from the late selloff in US stocks. Yen was the second strongest on risk aversion while Swiss Franc was not too far away. Commodity currencies, on the other hand, ended generally lower. Traders ignored the dovish tapering of RBA, and the cautiously optimistic BoC. Euro also got no support from ECB’s PEPP recalibration.

Risk sentiment would likely continue drive the forex markets in the near term at least. In particular, DOW’s selloff on Friday is seen as a technical warning that deeper correction is underway. We’ll keep an eye on the development there, and see if DOW would drag other major indexes further down. Or, strength in tech and others could help floor DOW’s fall, and thus, cap Dollar and Yen’s rebound.

DOW broke 55 day EMA, a warning for stock bulls

While developments in S&P 500 and NASDAQ are still bullish despite Friday’s pull back, the extended decline in DOW is sending investors a warning. DOW has lost its near term bullishness again by breaking through 55 day EMA, as well as 34690.25 support. It’s still early to call 35631.19 a medium term top. If DOW could quickly climb back above 55 day EMA, recent up trend is still intact for another record high.

However, risk of a deeper correction is increasing, considering bearish divergence condition in daily MACD. Sustained trading below 55 day EMA this week would likely extend the decline to test on 33741.16 support. Firm break there will argue that it’s already in correction to whole up trend from 26143.77. In this case, next target would be 38.2% retracement of 26143.77 to 35631.19 at 32006.99, which is slightly below 55 week EMA.

DXY recovered ahead of 91.78 support, maintains upside prospect

Dollar index recovered ahead of 91.78 support last week, maintaining some near term bullishness. There is prospect of extend the rise from 89.53 through 93.72, in particular if risk sentiments turn sour. But overall, we’re still slightly favoring that the pattern from 89.20 as a three wave consolidation pattern. Hence, 38.2% retracement of 102.99 to 89.20 at 94.46 is a major hurdle for DXY to overcome to turn medium term outlook bullish.

On the other hand, break of 91.78 support, or rejection by 94.46 in case of anther rise, would argue that whole down trend from 102.99 (2020 high) is ready to resume through 89.20, and possibly through 88.25 (2018 low) too.