FX Review May23 to May28: Dollar Set to Snap Three-Month Decline

GBP/USD

Many linked sterling’s outperformance (+0.8%) to a growing sense that the UK will vote to remain in the EU, despite angst reflected in the elevated cost of insurance (one-month options).

Sterling’s upside momentum that carried it from $1.4445 at the start of the week to $1.4740 on May 26 faltered. Sterling stalled in front of the month’s high set on May 3 near $1.4770, which is also where the 200-day average is found.  A bank holiday in the UK and the Memorial Day holiday in the US will make for a slow start to the new week.  Sterling looks vulnerable to a deeper pullback that could extend toward $1.45 in the coming days and possibly a bit lower.  There is some risk that a double top is in place.  To confirm it, the mid-May low near $1.4330 needs to be convincingly violated.   If valid, the pattern would project a push toward $1.39.

USD/JPY

 EUR/USD

The euro struggled to maintain even the slightest of upticks.  The two-year spread between the US and Germany widened out to almost 145 bp from less than 129 bp on March 20.  The euro fell for the fourth consecutive week and the sixth of the last seven weeks.  Barring a significant surprise in the first couple of sessions next week, the euro is set to post its first monthly loss since January.

The euro’s technical condition remains poor.   Since the break of $1.12, we have been looking for $1.1070. It corresponds with a retracement objective and where a trend line drawn off last December’s and mid-March lows intersect at the end of next week.  It is also just below the 200-day moving average, just above $1.11, that held before the weekend.  The euro is pulling back after moving briefly above $1.16 at the start of the month.   We are watching closely for a technical signal of an upside correction that we anticipate before the $1.10 area yields. If we are wrong, a break of $1.0940 points to a return to $1.08.  On the upside, initial resistance is seen in the $1.1200-$1.1250 band.

USD/CAD

The Canadian dollar (+0.7%) was helped by oil’s flirtation with $50 a barrel and a central bank that was perhaps less dovish than some expected.

The US dollar pulled back to almost CAD1.29, which is a 38.2% correction to greenback’s rally from the key reversal low on May 3.   We suspect that is sufficient from which to continue the US dollar recovery.  We note that the US dollar rarely moved above its 20-day moving average as it fell from the end of January through early May.  The 20-day moving average is now acting as support for the greenback on the way up.  A move above CAD1.3080 would raise our conviction of re-test, and likely penetration of the CAD1.3190 high see on May 24.  Our near-term target is a little above CAD1.33.

 USD/AUD

The Australian dollar’s decline does not appear finished either.  It spent the past week nesting.  Participants seem more eager to sell upticks than buy dips.  A break of $0.7140-$0.7160 would signal a resumption of the down move.  Initially, we look for $0.7065, but a move below $0.7000 seems to be a matter of time.