Dollar rally stalled, Swiss franc eclipsed euro
The euro ended the week broadly higher, helped by the historic ECB rate hike. Still, it was eclipsed by the Swiss franc, which was the biggest gainer after the SNB reiterated its favorable host stance on franc appreciation. The Canadian dollar followed in third place, also after another massive rally by the Bank of Canada.
On the other hand, Yen was the worst performer. There was some jaw-dropping support from Japanese officials. But there is little chance of a rebound given the policy divergence with other major central banks. The New Zealand dollar and the US dollar were next. The greenback has started to reverse some recent gains and risk sentiment has improved.
Euro’s underlying strength uncertain despite historic ECB hike
The euro ended broadly higher after the ECB announced a historic rate hike of 75 basis points. EUR/USD recovered parity after hitting a short-term low at 0.9863. But there are still doubts about the underlying strength of the euro.
First, the euro clearly underperformed the Swiss franc. EUR/CHF’s drop last week suggests a rejection by the 55-day EMA. The rebound from 0.9550 was held below the 38.2% retracement from 1.0512 to 0.9550 to 0.9917. Both maintain a bearish outlook for EUR/CHF for a further dip through 0.9550 at a later stage to resume a larger downtrend.
Second, while the EUR/GBP rally looked promising, it is still capped below the 0.8720 resistance and struggled to break above the medium-term Fibonacci resistance at the 38.2% retracement of 0.9499 to 0.8201 to 0.8697. A break below the 0.8565 support will signal another rejection by 0.8697 and lead to another drop as the third leg of the pattern from 0.8720.
Third, EUR/CAD also remained range-bound last week, struggling to clear the 55-day EMA and capping below short-term resistance at 1.3271. The development maintains the bearish outlook for another dip through 1.2867 at some point to resume the broader downtrend.
The Swiss franc is strong as the SNB says appreciation helps
Against the euro, the strength of the Swiss franc is much more apparent. Markets expect another 50 basis point rate hike from the SNB on September 22, with the possibility of a 75 basis point move. More importantly, SNB Chairman Thomas Jordan reiterated last week that “at the moment it is rather true that given the inflationary pressure, an appreciation of the franc tends to help rather than hurt.” . The will to increase the franc is a key factor that helps it increase.
The downtrend in GBP/CHF continued last week and broke through the 2020 low at 1.1107. But unlike GBP/USD’s reaction at 1.1409, there is no sign of a rebound yet. Outlook will remain bearish as long as 1.1244 minor resistance holds. The firm break of 1.1107 will open the way for a 200% projection from 1.3070 to 1.2134 to 1.2598 to 1.0726.
CHF/JPY uptrend also resumed last week and jumped up to 148.45. While the yen rallied considerably on Friday, the decline in CHF/JPY so far has been very shallow. Consolidations should be relatively brief as long as 146.90 minor support holds. The breakout of 148.79 will target a 100% projection of 127.48 to 143.73 from 137.13 to 153.38, which matches the peak rise made in 2015 after the SNB suddenly removed the cap on the franc exchange rate.
The dollar reversed its gains as the risk market digested the upcoming Fed hike well
As for the dollar, it reversed some of the recent gains on improving risk sentiment. Investors seemed to have digested another 75 basis point hike from the Fed on September 21 well. Fed funds futures now price a 91% chance of that happening. Still, US stocks rebounded strongly, ending a three-week losing streak.
The S&P 500’s close above the 55-day EMA and the 4000 handle was a positive sign. Stronger rebound is slightly in favor towards 4325.28 resistance. But it should be noted that the price moves from 3636.87 probably form the second leg of the corrective pattern from 4818.62 (the first leg was the three wave move from 4818.62 to 3636.87) . The second stage of a corrective pattern tends to be rather unpredictable, in terms of size, duration, and pattern. It will therefore not be surprising to see flip-flops again.
The Dollar Index should have formed a short-term high at 110.78. Near-term risk is slightly on the downside, for a deeper pullback towards the 55-day EMA (now at 107.12). But there is no clear sign of a reversal as long as it stays well inside the medium-term bullish channel. Another rally through 110.78 is still expected at a later stage.
But given the possibility of a bearish divergence condition in the daily MACD, a sustained break of the channel support (now around 106), could signal the start of a medium-term correction towards the 104.63 support and below. If that happens, it should correspond to a break of the resistance at 1.0368 in EUR/USD.
AUD/USD Weekly Outlook
AUD/USD fell to 0.6698 last week but rallied ahead of the 0.6680 low. The initial bias is slightly to the upside this week for the 55-day EMA (now at 0.6919). A sustained break at this level will then target the resistance at 0.7135. On the downside, a decisive break of 0.6680 will resume a larger downtrend.
Overall, price action from 0.8006 (2021 high) is seen more as a corrective pattern to move lower from 0.5506 (2020 low). Or it could also be a bearish impulse move. Either way, the outlook will remain bearish as long as the resistance at 0.7135 holds. The next target is a 61.8% retracement from 0.5506 to 0.8006 to 0.6461.
On the long term, the rejection by the resistance at 0.8135 suggests that the long term downtrend from 1.1079 (2011 high) is not about to reverse. Yet the structure of the fall from 0.8006 still supports that this is a corrective move. Therefore, a break of the 0.5506 low is not in sight at this time. The long-term outlook remains neutral at first, and will be reassessed later after the fall from 0.8006 is over.