The week has started off on an interesting note. European CPI flash estimate came in below expectations at 0.5% vs 0.6%, Chicago PMI also came in worse than expected at 62.6 vs 63.2, but US Pending Home Sales came in strong at 6.1% vs 1.4%. The dollar sold off quite heavily though in favour of the Europeans with Cable breaking the 1.7100 barrier, EURUSD breaking above the post-ECB rate cut highs and USDCHF dropping through support to resume the previous trend. This is significant for two reasons, firstly it’s one in the eye for Draghi and his seemingly dud bazooka. Clearly the market will only sell Euros once QE is instigated or the real (rather than nominal) European vs US short dated interest rate differential starts to point lower for EURUSD. Secondly US 10 year treasury yields continue to fall, further weighing on the dollar which is adding to the pain for the ECB in combating the Euro rally.
**US 10 year Treasury Yields**
Tuesday sees Manufacturing PMIs from China which could aid risk sentiment given how strong they were last time and the chance of a further strong number. We also have a host of manufacturing PMIs from Spain, Italy, the UK and the US which usually leads to quite a melting pot of crosswinds unless the performance is uniform across countries (which it rarely is).
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Now comfortably back inside the bearish channel that we broke ahead of the ECB rate cut, the dollar has failed to make a higher high and continually been heavy after the initial run higher to try to break the large bearish ECB rejection from highs.We have paused for breath at minor dollar support but in other indexes we will see that this is in fact key resistance for many indexes so we could expect a period of either slow painful downside for the dollar or a period of consolidation as these index resistances are paid respect to and indicators such as the USD% index RSI becomes less oversold. The direction seems to have been chosen now though so a further drop in the dollar is expected longer term and we continue to sell the rallies. A retest of the broken USD% index support will now act as good resistance if we make it that far. I am bearish USD% although expect consolidation of this move first
**USD% Index Resistance (EURUSD support): EURUSD 1.3667, 1.3635**
**USD% Index Support (EURUSD support): EURUSD 1.3774, 1.3829**
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