US dollar wobbles ahead of earnings but remains near 2-week low

The US dollar index struggled for direction as investors shifted their focus to the upcoming season. The dollar also reacted to the falling oil prices and the recent actions by the Federal Reserve.

US dollar index wobbles ahead of earnings

Investors eye corporate earnings

US stocks have rallied in the past two weeks, with the Dow Jones, S&P 500, and Nasdaq gaining by more than 18%. These gains have been driven by the government and Federal Reserve stimulus and the perception that the worst is behind us.

This rally will be tested tomorrow, when the big US banks and companies start to release their first quarter earnings.

JP Morgan (NYSE: JPM), the biggest bank in the United States, will be the first big bank to release its earnings tomorrow. It will be followed by Wells Fargo (NYSE: WFC), the troubled bank that has assets worth more than $1.9 trillion.

On Tuesday, the banks to watch will be Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Bank of America (NYSE: BAC), and Morgan Stanley (NYSE: MS).

Other important companies that will release their earnings this week are Johnson & Johnson (NYSE: J&J), JB Hunt (NASDAQ: JBHT), Abbott Labs (NYSE: ABT), and Danaher (NYSE: DHR) among others.

According to Bloomberg, analysts expect negative results and guidance from most companies. In a recent earnings insight by Factset, the company expects earnings for S&P 500 companies to drop by 10%. This would be the worst quarterly performance since Q3’09, when earnings dropped by 15.7%. The report said:

“Six sectors are predicted to report year-over-year growth in earnings, led by the Communication Services sectors. Five sectors are predicted to report a year-over-year decline in earnings: Energy, Consumer Discretionary, Industrials, Materials, and Financials.”

Also, in his letter to shareholders, Jamie Dimon, warned that the US could go through a bad recession this year. This will be negative for corporate earnings. He said;

“At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008.”

US dollar fundamental outlook ahead of earnings

The US dollar tends to have a unique relationship with US stocks. In most cases, a strong dollar tends to be negative for stocks in the S&P 500 because most of these companies have significant operations overseas.

Negative Q1 earnings from the big banks and a negative outlook could have a negative impact on the US dollar. This is partly because it would lead to increased volatility in the stock market and possibly more action by the Federal Reserve. Some of these actions, including lower interest rates and quantitative easing could have a negative implication for the US dollar.

US dollar technical outlook

A good way to analyse the US dollar is to focus on the dollar index. The index measures the strength of the dollar by comparing it with a basket of other peer currencies.

On the four-hour chart, the dollar index has been forming a descending triangle pattern. The price is below the 50-day and 100-day exponential moving averages and is slightly below the 61.8% Fibonacci Retracement level. The index may continue being under pressure and test the 50% retracement level of $98.80.