Dollar oil and stocks rush out of the gates

The New Year has started with a bang, at least in the case of the dollar, stocks and crude oil. After a year-end spike, the EUR/USD has fallen back below the pivotal 1.05 level, though at 1.0380 it was still just about holding above the December and 2016 low of 1.0350 at the time of this writing. The dollar had also regained its poise against other weaker currencies such as the JPY, CHF and to a lesser degree GBP. As a result, the Dollar Index was holding near last year’s highs and threatening to break further higher. It was more of the same for other markets, too: crude oil has risen further to reach its highest levels since mid-2015 on expectations of reduced supply excess, the FTSE is at a new all-time high as stocks remain bid amid the low interest rate environment, while gold remains largely out of favour as the perceived safe-haven assets take a back seat.

Plenty of data to watch this week

But there’s plenty of economic data to cause short-term volatility to spike this week. Already we have seen better-than-expected manufacturing PMI data from China, Spain, Italy and the UK, while German unemployment fell more than expected. In the UK, the manufacturing sector grew in December at its fastest pace in 2½ years as the slump in sterling drove exports. The PMI rose to 56.1 from 53.4 in November. We will have more market-moving data to look forward to later on in the week. Among them are the FOMC’s last meeting minutes on Wednesday; UK and US services PMIs, and the ADP private sector payrolls report all on Thursday and the official jobs data from both the US and Canada on Friday.

Dollar remains fundamentally strong

Ahead of these important macro pointers we may see the dollar buying pause for breath before it potentially breaks out to new multi-year highs. But fundamentally, the dollar remains supported due to the fact the Fed has not only turned hawkish but it has already started its policy tightening cycle, while the rest of the major central banks are pretty much dovish across the board. We still think the EUR/USD will probably fall to at least parity in the coming weeks or months. But probably not before another bounce of some sort.

EUR/USD due a short-term pullback?

At the time of this writing, the EUR/USD was clinging onto short-term support around 1.0350/75. We may see a pullback here towards resistance in the 1.0460 to 1.0525 range, where the EUR/USD may then resume its downward move. However if it closes above the high of this range then this would render the breakdown as a false move. In this case, we could see a much larger recovery and it may be some time before we start taking about parity again. The bulls will take heart from the fact the RSI is in a state of positive divergence. It has made a couple of higher lows while price attempted to make lower lows, which didn’t lead to a material sell-off. Thus, the selling pressure may be waning slightly. However, if the 1.0350 support breaks and price holds below it then there are little further points of reference until parity. The exceptions being round figures like 1.0200 and 1.0100.