Start of dollar recovery

Following big falls in some risk-sensitive assets on the back of North Korea tensions, a number of global stock indices and dollar currency pairs ended the session with impressive reversal-looking technical patterns as the dip buyers evidently stepped in to take advantage of the lower prices (see the technical outlook section below). Price action for the dollar looks the most interesting as we may finally have seen the bottom for the US currency. But it is far too early to jump into any conclusions and more evidence – both technical and fundamental – is required in order for the dollar bulls to re-emerge in a more meaningful way. Indeed, it is a nonfarm payrolls week so the dollar’s recovery may turn out to be a mere short-covering bounce.

Dollar-negative news may be priced in

The greenback has been falling throughout this year as Donald Trump failed to deliver the tax cuts and huge fiscal spending he had promised pre-election. Incoming US macro data has been far from being impressive for much of the year, although not bad enough to cause the Fed to drop its hawkish stance. Instead, the market has adjusted its expectations and now anticipates a somewhat slower hiking cycle from the Fed. But with the dollar already adjusting sharply lower, most of the negativity may already be priced in. So, going forward, market participants may use any piece of good news as an excuse to buy the dollar. Friday's official jobs report will be of high importance in this regard. But first up is the private sector jobs report from ADP, which will be released later on today. The ADP report is expected to print a headline figure of 185,000 which would be slightly higher than the prior reading of 178,000, although this may be subject to a revision.

Foreign Central Banks resist calls for tighter monetary policy

Another reason why the dollar could come back is due to foreign central banks such as the Bank of England and the European Central Bank resisting calls for tighter monetary conditions. With the euro in particular appreciating significantly since the turn of the year, we may see at least a pause in the EUR/USD exchange rate around the psychologically important and resistance circa 1.20. The ECB has indicated that it may make a decision on the future of its bond buying programme in autumn. This makes its next meeting on September 7 a highly anticipated event. Thus given these expectations, the euro could fall sharply in the event the ECB fails to make any major announcements at this meeting. And even if it does, one has to wonder how much of that move would have been priced in by then. So whichever way you look at it, the euro’s upside potential looks limited in my view.

Technical outlook: tentative bullish signs for USD/JPY

As mentioned, a number of dollar crosses have shown potential bullish reversal patterns following yesterday's price action. The USD/JPY for one created a large bullish engulfing candlestick pattern around the long term 108.30-108.85 support area after sweeping liquidity below last week's inside bar candlestick pattern. This pair is now testing liquidity above last week's range i.e. above 109.85 area. If there is acceptance above this level then the sellers may abandon their bearish positions further and the buyers may increase theirs. However if this turns out to be another false bullish signal then price may eventually drop below this week's low of 108.30 area, below which there is a large pool of liquidity is surely resting now (i.e. buyers' stop loss orders). The next key resistance level or bullish objective on the USD/JPY is at 110.60, followed by 110.95-111.05 area. The next key support below this week's low is at 108.15, this year’s low, followed by 106.85-90 zone.