Will the US dollar resume its downward correction?

Currency markets traded rangebound overnight, with very little to show in the G-10, Asia FX or EM space. The Dollar Index technical chart, however, is testing the bottom of its rising wedge, and it’s screaming that the downside US Dollar correction still has legs. Overnight, the Dollar Index finished nearly unchanged at 106.48 but broke through wedged support at 106.40 today, falling 0.18% to 106.29. A daily close below 106.40 signals further losses towards 1.0500 and 1.0350, and it could extend to the long-term breakout of 102.50. Resistance is at 107.00, 107.30 and 108.00.

EUR/USD was flat at 1.0230 overnight, gaining 0.15% to 1.0237 in Asia. Russian gas woes could limit gains despite the constructive technical chart. It has resistance at 1.0275, but only a sustained break above 1.0360 would suggest a longer term low is in place. EUR/USD has support at 1.0150 and 1.0100.

GBP/USD edged up 0.35% to 1.2040 overnight, hitting 1.2065 in Asia. The Pound has support at 1.1900 and 1.1800, with resistance taken at 1.2060 today followed by 1.2200. A close above the 1.2060 wedge formation signals a bigger rally towards the 1.2400 regions, but it would take a sustained break above 1.2400 to call for a longer term lower of the pound sterling.

As US yields move sideways overnight, USD/JPY drifted 0.40% higher to 136.65 overnight, where it remains in Asia. A loss of 135.50 sets the stage for a bigger downward correction, potentially reaching 132.00. Initial resistance is cleared away at 138.00 followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in check.

AUD/USD and NZD/USD rose slightly overnight to 0.6960 and 0.6265, where they remain in Asia. They continue to consolidate their respective top corner breakouts. Only a return below 0.6800 or 0.6150 alters the short-term bullish technical outlook. Like the AUD and NZD, the Asian FX space was virtually unchanged overnight and is in a wait-and-see pattern ahead of the main events of the week, starting with US tech earnings tonight.

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With over 30 years of experience in the foreign exchange market – from spot/margin trading and NDFs to currency options and futures – Jeffrey Halley is OANDA’s Senior Market Analyst for Asia -Pacific, responsible for providing timely and relevant macroeconomic analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia, as well as prominent print publications including the New York Times and The Wall. Street newspaper, among others. He was born in New Zealand and holds an MBA from Cass Business School.