Dollar Index: Bullish divergence ahead of next week’s ECB

The US dollar began this week on a sour note. The greenback was offered across the board after North Korea fired missile over Japan. The resulting jitters in the financial markets saw investors run for the fox hole, i.e. safe havens like US treasuries, gold and lower yielding currencies like the Japanese Yen. 

The Dollar Index [DXY] clocked a weekly low of 91.62 before turning higher to 93.35 levels. The index fell to a low of 92.10 after the US wage growth numbers missed estimates. Despite the allround weak numbers, the weekly low of 91.62 was not challenged. In fact, the index currently trades on a positive note around 92.85 levels. 

Extended weekend plays spoil sport: Dollar’s resilience could also be due to the fact that US desks are heading for an extended weekend. Markets are closed on Monday on account of the Labour Day holiday. 

The ECB works hard to keep the EUR/USD below 1.20: The currency pair jumped to a high of 1.1980 following the release of dismal US data, only to fall back to 1.1850 on ECB’s jawboning. The central bank is expected to shoot down QE taper speculation next week. The jawboning seen today is likely to keep the buyers at bay ahead of the next week’s ECB decision. 

Technicals - Bullish RSI divergence

Daily Chart

• The bullish price RSI divergence on the daily chart suggests the sell-off from the January high of 103.82 has run out of steam. 
• However, the outlook would turn bullish only after the descending trend line from the April 10 high and May 11 high has been breached, in which case the resistance at 96.32 [June 14 low] could be put to test. 
• On the downside, only an end of the day close below 91.62 would revive the big sell-off and could yield sub-90 levels. 

FX snapshot

EUR/USD: Bearish RSI divergence on the daily chart. Failure to hold above 1.1910 [Aug 2 high] could yield a drop to strong support around 1.1730. On the higher side, 1.20 is big resistance.

GBP/USD: An end of the day close above 1.2967 [50-DMA] would kill the odds of the pair forming a head and shoulders pattern on the daily chart.

USD/JPY: Bullish MACD divergence on the daily chart, still needs to break above 110.95 [Aug 16 high] to entice the bulls. 

AUD/USD: Trend line sloping higher from June 2 low and July 7 low remains intact. A break above 0.80 could open doors for violation at the July high of 0.8066. 

NZD/USD: Rejection at head and shoulders neckline 0.7204 reinforces bearish outlook. Sell-off could gather pace below the 200-DMA support of 0.7132. 

USD/CAD: Yesterday’s bearish outside day candle and a negative action today confirms the corrective rally is over. The pair clocked a low of 1.2340 today and looks set to peep below the monthly 50-MA level of 1.2318. The daily and monthly RSI sow plenty scope for fall, while the weekly RSI is close to being oversold.