The dollar is back on the back foot this week as the dollar plummets to 30 months low. Further decline is very much likely to 90 as the current risk-on pushed stocks to fresh highs.
Risk appetite has improved in the last quarter of the year. Although rising Covid cases is capable of inflicting global economies with more setbacks but stimulus and vaccine headlines have helped to provide psychological support. The S&P 500 and NASDAQ set a new all-time high record on Monday. Despite Covid second wave, the country has not yet enforced strict restrictions.
Stimulus and Vaccines boost Risk
Fed Chair Powell said before the congress on Tuesday that recoveries have been better than expected. However, there is still a long way before a complete recovery. He earlier predicted 2023. The bank’s chief, therefore, promised more monetary support for the economy when needed. He said the interest rates will remain near zero unless there is actual inflation and also called for more fiscal support. A new stimulus package worth $908 billion could be delivered in December or January before or after Biden’s swear-in.
While investors hope the stimulus package will be delivered as anticipated, the spotlight will also be on the vaccine development and US politics. How soon will the vaccine be distributed? Will Biden enforce lockdown shortly after taking over the office? Trump is getting soft thus building hopes of a drama-free transition of the world’s biggest political power seat. Save for surprises, the current risk-on scenario should last throughout December. This would therefore exert more pressure on the Dollar.
Macroeconomics – Non-farm payroll
Macroeconomics has not been on the green side this week so far. November home sales in the US dropped by 1.1% while Chicago PMI fell below expectation as well as the ISM PMI. Coming later this week is the Non-farm payroll along with other employment data. The US unemployment rate is expected to drop to 6.8%. In October, fresh 638k jobs were recorded. Market consensus expects the figure at 500k in November. The non-farm payroll data on Friday should give the market short-term volatilities especially if the actual release largely deviates from the expected figures. If the unemployment rate falls below expectation and the NFP is 550k or more, the dollar should roar back. DXY could then bounce above 91.73. On the other hand, if the unemployment rate hits 7.0 or higher and NFP falls below 400K, the dollar index should hit 90.
DXY Technical Analysis – Elliott wave theory
Since March, the dollar index has shed over 11%. After breaking below the 91.7 support, DXY could be off to the 90 psychological support. From the Elliott wave perspective, as the chart below shows, a bearish impulse wave from 103 is emerging. Wave (4) ended at 94.7 in late September. Wave (5) is currently in motion and we have reasons to believe that this leg of the bearish run from 103 is not yet over.
First, wave (5) should complete an impulse wave or ending diagonal pattern. None of these patterns have yet surfaced. An impulse wave is more likely looking at the current pattern development. Second, the price just broke below the end of wave (3) and could go significantly lower. Third, Fibonacci projections set 38.2% and 50% of wave (1)-(3) from (4) at 90.4 and 89.08 respectively. Wave (5) should hit any of these levels and perhaps lower to the 61.8% Fib level. We might see a minor bounce to 91.7-72 before the next decline.
From fundamental and technical indications, the greenback is poised for more decline. Friday’s employment data will give more clues. The dollar’s performance will continue to influence the major currency pairs. Therefore, while analyzing major FX pairs, it can be very important to look at them from binoculars of the dollar index.
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