June was a bad month for dollar and European stocks

In June the major European equity indices ended lower, while in the US the markets were mixed as the tech-heavy Nasdaq 100 bucked the trend of an otherwise bullish month. European equities were undermined in part because of a firmer euro and pound, while a weaker dollar helped to support US equities. The greenback eased against a basket of foreign currencies for the second consecutive quarter and the fourth straight month.

It will now be interesting to see what happens to not only the dollar but also equities as we move deeper into the summer, a seasonal period which is typically not great for the latter. Throughout the month of June, we had rate decisions and speeches from heads and key policy members of several central banks. On the whole, they delivered mostly hawkish remarks about the future path of interest rates, owing to an improving global economy and pickup in inflation. The Federal Reserve, Bank of England and Bank of Canada were all surprisingly more hawkish than expected while the Bank of Japan and the Swiss National Bank were among the few remaining dovish camp. The European Central Bank delivered mixed messages but overall it appears that an early tapering of the QE stimulus programme is becoming increasingly likely here.

With equity prices being supported for so long almost entirely by the extraordinary low interest rates, now that the tide is turning we could see the markets struggle to push further higher.

As far as the dollar is concerned, well it is in the lower half of its 2.5-year range against a basket of foreign currencies. After last week’s breakdown, the small rebound at the start of this week could prove to be a dead-cat bounce – unless we see a break in market structure. The dollar bears will want to see resistance levels at 96.32 and 97.05 hold. However if these level don’t offer much resistance and the DXY subsequently breaks above last week’s bearish candle, then that would mark the end of the downtrend in the short-term. In the slightly longer-term outlook, it would still need to break the downward trend in order to confirm the turnaround. Meanwhile on the downside the next area of potential support for DXY is around 94.30-45 – here two Fibonacci retracement levels from prior upswings converge. Below this area would be the bottom of the range and 200-week moving average around the 92.00 area. We don’t expect the dollar to fall significantly below that level without first staging a fight back.