One of the most basic but important questions traders have to ask themselves is whether the market they are looking at is trending or moving sideways. The tactics and tools vary according to the answer. 

The turn of the calendar–a new marking period begins–offers an opportunity to look afresh at the price action. What makes a review of the dollar difficult, however, is that we only know the dollar relative to other currencies and there is no one pattern that fits all.  

The euro appreciated by 2.7% against the dollar in Q1. The rally was mostly a January story, and for the past two months, it has been trading broadly sideways. One way to illustrate the range-trading is that the five, 20 and 50-day moving averages have converged (~$1.2340-$1.2355).

In the larger picture, the euro’s rally since last April when it became clear that the populists-nationalists were not going to win in the Netherlands or France, has brought it to an important technical area that is has stalled around. The $1.2520 area, for example, marks the 38.2% retracement of the euro’s decline from the record seen in July 2008 near $1.6040. The $1.26 area houses a monthly downtrend line from then as well as the 61.8% retracement of the euro’s decline since mid-2014 when it was last near $1.40.  

While those levels give one a sense of likely inflection points on the upside, a break to the downside should not be ruled out. Market positioning and sentiment heavily favor further dollar losses, but the widening short-term interest rate differential (think Eurodollar and Euribor) makes it increasingly costly to be long dollars against the euro without the euro appreciating to offset the carry (interest rate differential). Currently, that interest rate differential translates into about five basis points a week. 

The $1.2180-$1.2200 area offers chart support, but on March 1, the euro spiked down to $1.2155 before staging a key reversal. But before the euro can set up a test on those important supports, it must punch through the base in the second half of March near $1.2240. A break of the range would set up a test on the $1.1940-$1.2040 area initially.  

The Japanese yen was the strongest of the major currencies in Q1, rising 6.1% against the US dollar. The highs were made late in the quarter, amid reports of aggressive exporter hedge-related dollar sales. The dollar fell to JPY104.55 on March 26, the lowest level since November 2016. It posted its own key reversal that day, and two days later, it tested JPY107.00.  

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