The market is showing euro and sterling bulls little mercy. It seems that only the briefest and shallowest upticks are seen before new lows are seen. he fact that the several bilateral dollar exchange rates are going through 200-day moving averages puts in on many medium-term investors radar screens for the first time in a year.
The dollar move has accelerated. The Dollar Index rose about 1.3% last week, the third weekly advance, but to put this run in perspective, it has risen in 11 of the past 14 weeks.
Such a move, we find, is typically a result of both sides moving, as there is good news in the US and less so from Europe and Japan. With fiscal stimulus soon to hit a US economy that is near full employment and the inflation target, the Fed can be confident of the direction of policy in a way the ECB with a preliminary core CPI reading of 0.7% (the trough was 0.6% in 2015) and no improvement with the April PMIs.
The BOJ has not even begun discussing an exit. If doubts grow about next year's inflation forecast, as we suspect they will, there may be pressure to do more, rather than less.
The Bank of England meets next week. Expectations for a rate hike have all but evaporated. In fairness, the expectations for an increase have simply been pushed further back. However, given the decline in sterling, not just against the dollar,but more broadly on a trade-weighted basis, a rate hike would, by and large, neutralize the easing of financial conditions that has been spurred through the exchange rate.
The euro met the 61.8% retracement (~$1.1935) of the rally off last November's low (~$1.1555) ahead of the weekend. Before returning to that low, several chart points are seen in the $1.17-$1.18 area. The dollar bears may try to make a stand there, perhaps on ideas that central banks will shift reserves from dollars to euros, as some have suggested.
The current leg down in the euro began April 19 with an outside down day. During this run, it has taken out the previous day's high once. It has not closed above the five-day moving average since April 18. It is found just below $1.20. The 200-day moving average comes in near $1.2020, and a retest should not surprise.
