As the US dollar appeared to break higher, we noted that it was overextended. Against most of the major currencies, it was beyond its Bollinger Bands, set at two standard deviations around the 20-day moving average. The correction that began mid-August does not appear over, implying a heavier technical bias for the dollar in the days ahead.

It looks as if the first part of the dollar’s downside correction is complete and now the second leg lower appears to have begun. The Dollar Index met the small head and shoulders objective near 95.00. It bounced back toward 95.70, the minimum 38.2% retracement of the push lower from the August 15 high. Provided that area holds, the downside risk extends to 94.60 initially and maybe 94.00. 

Ahead of the weekend, the euro rose to its best level since August 2. Explanations that seek to attribute the euro’s rise to Trump’s offer to buy Italian bonds or Powell’s comments seem like post-hoc rationalizing. The euro has closed higher for seven of the past eight sessions. The technical indicators warn of additional euro gains in the near-term. The $1.1700 area, and possibly, $1.1750 seem like reasonable short-term targets.  

The euro may have traced out a head and shoulders bottom. The euro finished the week near the neckline ($1.1625). If it is valid, the measuring objective would be near $1.1950. That is in between the 50% retracement of this year’s decline ($1.1880) and the 61.8% retracement ($1.2025). The weekly technical indicators are turning higher and seem broadly consistent with the chart pattern. Still, with the near-record cost of carrying a short dollar position, momentum traders will be quit to the exit on any sign the rally is faltering. 

The dollar reached its highest level against the Japanese yen since August 6 ahead of the weekend before reversing lower to leave a possible shooting star candlestick in its wake. It continues to walk down the trendline drawn off the June 2015 highs and through last January and November highs. The July breakout proved to be a false break. The trendline comes at the end of the month near JPY111.10. A convincing break would point to another run at JPY113. The daily technical indicators are not clear, but the weekly readings favor dollar losses. The JPY110 area marks the lower end of the nearly two-month-old trading range.