Our resident Queen Chartist is back with her latest thoughts on the USD/THB/Euro and impact on markets, its a long read so get a cup of coffee and enjoy 🙂

A quick snapshot before the highly-anticipated Jackson Hole symposium. 

The economic conference at Jackson Hole, Wyoming, had never been center of market’s interests until in 2010 when Bernanke signaled the coming of the QE2. This time, with Janet Yellen scheduled to speak on Thursday, and Mario Draghi on Friday, the world is watching.

The scenario that I have in mind is, Yellen will reiterate that despite overall strength of the U.S. economy, the jobs market remains weak and that the Fed will maintain its low-interest rate environment. Draghi may carefully address the possibility of the ECB’s asset-purchase if more signs of Euro-area economic weakness are seen. I don’t think that there will be any surprise or hint coming out late this week. Why? Some charts say so.

We are at a very interesting turning point. Any statement from the Jackson Hole conference will cause price movement in the U.$. dollar and the Euro. I have been observing the U$ dollar and the Euro for two weeks, and I believe that everyone has been seeing the same thing: they both are moving nowhere.

The U.S. dollar index is stalling at the technical resistance at 82.00, with some interesting patterns. At the channel resistance shown in chart below, the index has already reached its cycle resistance. The cycle resistance and cycle support are used to gauge the timing of the trend. The point where the price reaches its cycle resistance/support is worth a watch as a breakout above the cycle resistance will indicate the bullish trend is even more solid, and vice versa for a fall below the cycle support.

Here, the U.S. dollar index has reached its cycle resistance, and for the past two times it reached this particular X-day cycle resistance, the index form significant correction. The index is also at its price resistance at 82.00. Moreover, the red circles highlight the similarity of price movement at this price resistance: the index fluctuated within a narrow range before declining. These three occurrences indicate the likelihood that the index may decline from this price resistance at 81.75-82.00.

In terms of timing, however, the chart also shows the cycle supports of the U.S. dollar index, which states that there is a cycle support that falls approximately on August 21-22, the first two days of the Jackson Hole symposium. Looking back in the chart, when the index fell to the Y-day cycle support, it formed a rebound. So, a fall from the price resistance at 82.00 may be supported by the Y-day cycle support on approximately August 21-22 or a few days beyond that.

It is a little tricky to gauge the downside of the decline from price resistance at 82.00. The first support line is at 81.25-81.10. A fall below that support will trigger a sharp volatility, possibly bringing the index down to test the support at 80.75-80.70.

In conclusion, if Yellen does reiterate that the Fed will keep the fed fund rate low for a number of time, the U.S. dollar is likely to weaken. Given all three Technical Analysis factors, as discussed above, the U.S. dollar index looks ready for a short-term correction. The downside for the correction may last a few days beyond August 21-22 and as deep as 80.75-80.70 level if the index falls below 81.10.

Such a scenario is also confirmed in the price movement of the euro, which weighs approximately 56% in the calculation of the U.S. dollar index. The chart below shows the U$D/Euro exchange rate. The euro  has weakened against the U.S. dollar for over a month and has been stalling at the technical support at 1.33 USD/Euro.

Note that the current fall occurs around the Z-day cycle support, meaning there is a tendency that the Euro will rebound against the U.S. dollar from this support. If Draghi refrains from giving details on the asset-purchase plan, the Euro should strengthen against the U.S. dollar, with resistances are 1.345-1.348 USD/Euro and 1.355-1.360 USD/Euro. 

These trends in the U.S. dollar and the Euro should last at least until early September, with the ECB’s monetary policy meeting is scheduled on September 4, when the market expectation should be reviewed and revised again.

 After 5 years in Technical Analysis, I have learned to mitigate the risk spurred by factors that can’t be quantified by looking at the relative strength between the risk and the market. Political turmoils and central bankers’ opinions are among factors that can’t be easily predicted or quantified. Since the U.S. dollar index is likely to be a factor that spurs volatility over the coming days and maybe into next week, I compare the U.S. dollar index with the stock markets.

The two charts above show the Dow Jones Industrial Average index and the S&P 500 index compared to the U.S. dollar index. If the indicator trends up, it means the Dow Jones (or S&P) outperforms the U.S. dollar index, and vice versa.

The charts show that both the Dow Jones and S&P have rebound from the oversold support relative to the U.S. dollar and the considerable upsides indicates that they both are likely to continue the outperforming trend regardless of the movement of the U.S. dollar index.

The Dow Jones has short-term resistances at 16,880-16,900 and 17,000-17,050 and supports at 16,650 and 16,500.

The S&P 500 has short-term resistances at 1,985-1,995 and 2,010 and supports at 1,940-1,930 and 1,905-1,900.

Similar trend occurs in the SET. Thailand’s SET index has rebound from the oversold support relative to the U.S. dollar and is likely to outperform the U.S. dollar index for a longer while.

The SET faces resistances at 1,522  /  1,566  and 1,574, with possible upside shown in the chart, and supports at 1,540 and 1,510.

 

All in all, I am not expecting any significant surprise from this coming Jackson Hole symposium. Market volatility possibly spurred by the symposium is mitigated by the fact that the stock markets, the U.S. and Thai in particular, are still outperforming the U.S. dollar index, meaning despite little bumps along the way, the markets should maintain their strength against the U.S. dollar and continue their rising trends. I’d rather focus on the economic data release, specifically the Euro-zone jobless rate and flash inflation, due on August 28 and 29 respectively, and Euro-zone GDP estimate on September 3 to gauge whether the ECB will surprise us with more dovish policy movement on its meeting on September 4.

Until then, happy trading.