Will the Greenback Return to Favor if Peak Dovishness is Passed?

The US dollar was little changed in the first half of June but fell out of favor in the second half as the market became convinced the Federal Reserve will begin cutting rates in late July and follow it up with two more cuts in H2.  Given then the world's largest economy continues to expand above trend, with unemployment at a historic low, and financial conditions supportive, it is difficult to envision the market discounting a more aggressive Fed than it has.  According to a recent Wall Street Journal survey, most economists expect two rather than the three rates that are discounted in the fed funds futures and OIS market.   

If peak dovishness has passed, with the dollar regain better footing?  What is the dollar's technical condition as the second half begins?  We seek to shed light on these issues below.

Dollar Index: The downside momentum seemed to exhaust itself on June 25 after falling to around 95.85, the lowest level in three months.  It reversed higher and settled in a range (~96.00-96.40) ahead of the end of the calendar period and the G20 meeting.   The technical indicators we look are extended and could turn soon.  Our near-term target is 96.80-97.00.  Note that the 200-day moving average is near 96.65 and very flat and the 100-day moving average is a little above 97.00.  

Euro: Europe's single currency fell in one session in each of the past two weeks.  A shelf has been carved in recent days near $1.1345, where the 200-day moving average is found.  The technical indicators allow room for a marginal new high, maybe toward the March high around $1.1450, before a corrective phase ensues.   In the bigger picture, the June gain of a little less than 2% marks the end of the five-month slide in the euro, the longest losing streak since late 2014/early 2015.  We think an important low was put into place in Q2 near $1.1100.  

Yen:   The dollar fell to roughly JPY106.80 on June 25, its lowest level since the flash crash on January 3 before reversing higher, forming a bullish hammer candlestick.  Follow-through buying over the next two sessions lifted the greenback to JPY108.15 before consolidating ahead of the weekend and end the month and quarter.  As it has done a few other times in Q2, the 20-day moving held the dollar's upside in check.  It has not closed above it since the year's high was recorded in late April.  It will start the new week a smidgen above JPY108.  The Slow Stochastics are already turning up, while the MACD and RSI lagging.  The dollar-yen is often a range-bound pair, and when it appears to be trending, it is moving into a different range.  If the JPY107 area, which was the objective of the double top pattern from March and April, is the lower end of the range, we suspect the upper end is in the JPY108.80-JPY109.00 band.  

Sterling: The British pound slipped slightly against the US dollar, ensuring it the dubious honor of being the worst performer among the majors, gaining only 0.5%.  That said, sterling appears to be in the last phases of a technical bottoming pattern.  A close above $1.2765 would open the door for a move a two-cent advance, though initially target $1.2850.  A break below $1.2660 would be disappointing and warn of risk to $1.2550-$1.2600.   One implication is that the euro-sterling cross may correct lower after approaching GBP0.9000 for the first time since January ahead of the weekend.  Initial support is pegged near GBP0.8975.

Canadian Dollar:  The US dollar fell to a new low for the year against the Canadian dollar before the weekend (~CAD1.3060) amid more evidence that Canada has emerged from the soft patch from late last year into early this year.  The greenback's decline has been orderly and consistent.  It has fallen in all but one session in the past two weeks.  However, the US dollar recovered ahead of the weekend and appears to have traced out a shooting star candlestick pattern, suggesting a corrective phase may be at hand.  We note that the CAD1.3050 is  (38.2%) retracement objective of the rally since the September 2017 low.  The initial target may be CAD1.3200.  

Australian Dollar:  The Australian dollar has been trending higher since the middle of May.  In fact, it has risen in five of the past six weeks, and last week's gain of 1.3% was the largest since the second week of the year.  It will begin next week with two closes above $0.7000 under its belt.  We expect it to stall in front of the high from earlier in June near $0.7025, which also corresponds to the (50%) retracement of the decline since the April high.  The technical indicators are stretched but do not show that they are about to turn.  The upper Bollinger Band is near $0.7040.  The next retracement (61.8%) is closer to $0.7065.  

Mexican Peso:  The dollar rose in five of the last six sessions against the peso.  Many leveraged accounts liquidated on the tariff scare and then had to re-establish the position.  The dollar returned to status quo ante bottomed on June 20 a little below MXN18.90.  The dollar did not close once above the 20-day moving average in June.  It begins the new month new MXN19.2725.  The technical indicators suggest that consolidation is the most likely scenario in the week ahead.  

Oil: Heightened tensions in the Gulf and a sharp drop in US inventories lifted WTI for August delivery to nearly $60, which corresponds to the (61.8%) retracement of the decline from the year's high set in April near $66.20, the 100 and 200-day moving averages, and the upper Bollinger Band.  The Slow Stochastics are about to cross down, and the RSI has leveled-off.  Initially, the $56.80-$57.00 area may offer support.  

US Rates: The US 10-year yield fell for the ninth consecutive week to straddle the 2.0% level.  Some large investment banks have cut their forecasts for the end of the year to 1.75%. The September Treasury note found bids when it tested the 20-day moving average on June 27.  It has been nearly two months since the contract traded below this moving average.   The technical indicators did not confirm the new contract highs, and the bearish divergence warns that downside risks (upside for yield) are building.  The two-year note yield rose for only two weeks in Q2 and has fallen for the last nine consecutive weeks.  The yield closed below 1.75% ahead of the weekend, its lowest level since December 2017.  The implied yield of the January 2020 fed funds futures contract snapped a seven-week 50 bp+ decline.  Here too, the technical indicators did not confirm the new highs, and the bearish divergence supports the hypothesis of peak dovishness. 

S&P 500:   The week began off with three consecutive losses but ended with a two-day advance.  It was not sufficient to avoid a minor 0.5% loss for the week and unceremoniously end a three-week rally.  The MACDs and Slow Stochastics are warning about FOMO inspiration.  New highs may be seen, but corrective forces are building.  The old gap from June 16-17 (2897.3-2905.4) is a reasonable near-term target.  The S&P 500 rose about 6.6% in June, its best monthly performance since January.  Italy edged it out for top billing for G7 markets.  Canada was the worst with less than a 0.2% gain. 

Disclaimer