Market Doubts of Three Fed Hikes This Year Caps Dollar

Bringing forward expectations of a Fed hike from
May-June to March was worth something for the dollar, but to get more now
, the market may need to recognize the
risk of three (or more) hikes this year.  
With the strong February jobs growth and a 2.8% year-over-year increase in
hourly earnings, rarely does the market’s confidence in an event surpass
current expectations for a hike on March 15.
However, the
market sees around a one-in-three or a
one-in-four chance of a third hike this year. 
The risks for the updated forecasts from
the Federal Reserve seem asymmetrically tilted higher, more rate hikes than
fewer by more members.  The hawkishness of regional presidents may be underestimated.  The data and the global
climate are conducive for expediting the normalization process.  The hawks will likely feel vindicated by recent
developments and may press their case with more vigor.  
The focus of
the Fed has arguably shifted.
  Previously, the issue was whether
the data would confirm that the economy was evolving toward the Fed’s targets.
 It did.  Rather than focus on the data points per se, officials
appear more confident of the direction and resilience of the economy and
prices.  They now are looking for opportunities, which helps explain the
campaign to prepare the market for the March 15 move.   
Still, the
dollar’s technical tone has deteriorated,
and the risk is on the downside over the next several sessions. 
  Our working hypothesis is that the dollar’s recovery
that began in early February against most of the majors ended and a correction
has begun,   For the Dollar Index, this means potential toward
100.75 and possibly 100.40.  The former is the 50% retracement of
that rally and coincides with the 100-day average (~100.80). The latter
is the 61.8% retracement.  Alternatively, if the Dollar Index has carved out a double top
near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10).  On
a break of the neckline, the measuring
objective is 100.  
The euro’s
pre-weekend rally saw it surpass the 50% retracement objective of its decline
from the February 2 high near $1.0830. 
 That retracement was around $1.0660,
and the 61.8% retracement is closer to $1.0700.  The euro’s five-day
moving average crossed above the 20-day average for the first time in a month.
 The single currency may be tracing out a double bottom at $1.05  The
neckline is $1.0630.  The measuring
objective is around $1.0760.  
After reaching
its highest level since January 19, the dollar reversed lower against the
Japanese yen, leaving a bearish shooting star candlestick pattern.
  If JPY115 area is the upper end of
the range, then JPY111.50 is the lower end.  But before seeing that, the
JPY114.30-JPY114.60 may prove sticky, and several technical signals converge
near JPY113.60, including the 20-day moving average, the 50% retracement of
this month’s advance, and the past week’s lows.
Sterling has
risen in two of the past 11 sessions, and
they were both on Fridays. 
 Even before Friday’s recovery,
sterling’s downside momentum was fading near $1.2140.  The upside is not
inspiring.  It spent the last two
sessions unable to move above $1.22.  That has been done previously in
this cycle.   The RSI and MACDs show no compelling reason to pick a
bottom, while the Slow Stochastics appears to be bottoming at over-extended
levels.  A close above the five-day, which has not happened since February
23 might be a preliminary sign that a correction has begun.  It is
finished last week a little above $1.2185.  Even then, the $1.23 area may
provide a formidable ceiling.  Sterling bears have had little of the pain
that is often necessary to spur position adjustments. 
The US dollar
rallied from CAD1.3060 on February 25 to CAD1.3535 on March 9.
  The RSI and Slow Stochastics warn
the move is over.  Initial support is seen
near CAD1.3400 and then CAD1.3350.   During the same period, the
Australian dollar fell from around $0.7740 to a little
below $0.7500.  Initial corrective targets are fond in the $0.7560-$7580
area and then $0.7620.  
OPEC is
producing more oil than expected and US inventories continue to rise. 
 Oil prices fell every day last week, culminating with
a 9% loss on the week.  It was the largest weekly fall in over a year.
  The May light sweet crude oil futures contract returned to levels last
since this past November, dipping below $49 a barrel before the weekend and
finished poorly (just above the session lows).   The market is extended as illustrated by three consecutive
closes below the lower Bollinger Band (~$50.30).  That said, speculative
market positioning was extreme and long.  The Bollinger Band will move
toward prices, but the $50 a barrel area may cap a technical bounce.   The
$46-$48 a barrel level basis the May contract offers strong support.  

The US 10-year
Treasury yields increased for nine consecutive sessions, over which time, it
rose a little more than 30 bp to test the high water mark from the end of the year.  
It had been recorded near 2.64% the day after the December
Fed hike.   After such a run, some sideways movement ought not to be surprising.  Provided it holds
above 2.50%, the pullback is not significant.  The June note futures contract
bottomed before the weekend at 122-20 and settled near its highs (above 123).
 Resistance is seen first around 123-10 and then ahead of 124-00.  

The S&P 500
extended its downside move in the first three days of last week and then
recovered in the last two. 
 Recall that the S&P 500 peaked
on March 1 near 2400.  It approached but held above the support we
identified near 2350.  The two-day recovery at the end of last week saw it
recoup nearly 50% of its slide.  The 61.8% retracement is near 2383.
 Despite the firmer tone over the last two sessions, many investors are concerned on valuation grounds, and there is increased talk of the adage about three steps (Fed hikes) and a
stumble.  

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