After a two-day resurgence, the dollar is retreating on Thursday ahead of the New York session. The market mood this week is back in support of the safe-havens as the stock markets stay on the back foot.
Earlier in the week, concerns about a new strain of the virus disrupted the bullish risk tone the market has enjoyed since last week. The S&P 500 quickly fell by over 600 points (-1.5%) on Tuesday and Wednesday. The dollar erupted to the upside with the market supporting risk-off after a much progressive retail sales data. While the impressive retail sales data was a pointer to a quick economic recovery, the data was more US-based than a broader global growth, thus giving a quick support for the greenback.
Despite the great news coming from the vaccine front, the fears of new mutations of the virus will continue to pose risks albeit temporarily. The market still conceives a hidden concern that new strains of the virus, that the current vaccines might not be able to deal with, could emerge. That’s something to keep in mind for traders and investors. The bullish phase of the market is expected to mount cautiously. Vaccine and stimulus hopes together with an expected growth in the global economy will remain supportive of risk appetite. On the other hand, poor growth-related data, Covid mutation and slowdown in vaccination and stimulus are supportive of risk-off.
Going into the New York session, the S&P 500 remains pressured. After two consecutive weeks of gains, which resulted in a fresh record high, this week is starting another correction thus boosting a quick surge for the dollar. The dollar index ran to 91 on Wednesday before shedding some of the gains back to 90.7. The short-term dollar outlook is therefore mixed while the long-term outlook remains to the downside.
Dollar Index Technical Analysis – long-term outlook
As the chart above shows, we had long reckoned that the dollar index has completed the 4th minor wave of the intermediate wave (5). Wave (5) was projected to end at 87 or lower. This is the long-term bias for the dollar. At the end of this bearish impulse wave move, we will look at the prevailing risk sentiment and inter-market correlation to examine any sentiment shift. At the moment, the long-term sentiments support more pressure for the dollar especially if the global political leaders and major central banks increase their stimulus packages and quantitative easing programs respectively.
On the technical front, we started counting a bearish impulse wave pattern for wave 5 of (5). Currently, as the short-term chart below shows, we have completed the sub-wave i (circled in red) of 5. However, sub-wave ii is currently debatable as it doesn’t look corrective yet.
Ideally, we would expect one more rally toward the deep Fibonacci corrective ratios of 77.6% and 88.9% at 91.28 and 91.43 respectively before the wild and big sub-wave iii (circled in red) of minor wave 5 drags the buck down to prices below 89. On the other hand, if the current rally to 91.07 is sufficient to complete wave ii (circled in red), the current dip will not look back until it hits below 89. The former seems to be more likely as the S&P 500 could plummet further. In all, traders should keep their options open in such a mixed market environment where things could change rapidly. However, once the road is clear, the bears are expected to drag lower unless the expected wave (c) leg (in blue) shoots above 91.6. It is then the short-term bias will turn bullish.
The dollar will continue to have a big impact on the major currency pairs. A bullish dollar index would cause a bullish USDCAD, USDJPY & USDCHF while a bearish dollar index would cause a bearish EURUSD, GBPUSD, AUDUSD & NZDUSD and vice versa if the current market correlation persists.
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