A Stronger Dollar is Weighing on the Pair
The trade-weighted dollar index (DX) found support this week and has erased a bulk of last week’s losses.
DX caught a bid at the 61.8% Fibonacci retracement, measured from the May low to high, early in the week. The index has printed a three consecutive day rally and closed at the highest level this year on Wednesday.
Last week’s spike high is within close proximity. However, it remains to be seen if the dollar index can make a sustained break to fresh yearly highs this week.
In the week thus far, the dollar has gained against all but one of the major currencies. The Aussie dollar is the exception as it trades essentially flat against the greenback.
Several Data Releases are Scheduled Out of the US Today
Preliminary GDP figures will be the highlight. Other notable releases include weekly unemployment claims, pending home sales, and a speech from FOMC member Clarida.
A strong GDP number stands to provide the catalyst that is needed to send the greenback to fresh yearly highs. However, I would exercise caution trying to chase the dollar higher.
So far, DX bears have shown that they like to step in on new highs. On several attempts since Q4 2018, DX has pulled back every time looks like it’s about to break out.
Note the pair really only fell under pressure in the last few hours of European trading yesterday. Since then, the GBP/USD has recovered about half of the losses.
A horizontal level at 1.2654 was respected as support in the early week. I now see the level as strong upside resistance in the event of a recovery today.
Ahead of 1.2654, there is some channel resistance which can be seen in the hourly chart above.
Support at 1.2624 has held the downside thus far. One thing that stands out to me is the recovery that has taken place from the level. There’s not a lot of momentum to the upside, and on smaller time frames, the recovery has the look of a bear flag.
- There is not a lot of evidence that 1.2624 support will hold and I expect to see a break below it in the session ahead.
- A break below last week’s low can trigger some stops and considering the downtrend for most of the week, I think that is a possibility.
- I see the next support level at 1.2575. I would consider a long from that level if there was additional evidence of a turn on the smaller time frames. The rationale being that a catalyst seems to be lacking for a DX breakout.