The U.S. dollar index (DXY) shrugged off weaker-than-expected U.S. economic data on Monday and rose slightly to close at 95.462. The Bureau of Economic Analysis (BEA), U.S. Commerce Department, said on Monday that personal spending fell 0.2% in January, worse than the expected decline of 0.1%. Weak consumer spending prompted analysts at Morgan Stanley to cut their first-quarter 2015 U.S. GDP growth estimate by five-tenths of a percentage point to a 2.3% annual pace, according to Reuters.

The BEA also said that the headline personal consumption expenditures (PCE) index for January increased only 0.2% year-on-year, compared to an increase of 0.7% in the previous month. The core PCE index came in at 1.3%, unchanged from the previous month, but well below the Federal Reserve’s inflation target of 2.0%. 

The U.S. dollar could receive some support from the announcement on Saturday by the People's Bank of China (PBoC) for a 25 basis point cut in both the benchmark interest rate and deposit rate. The offshore yuan (CNH), which started to rise late Friday, surged to an intraday high of 6.2996 yuan per dollar as forex traders were selling the CNH and buying the U.S. dollar.

The spread between the China renminbi (CNY), or Mainland yuan, and the CNH widened to 1.74 bps at the close on Monday as the U.S. dollar – CNY and – CNH exchange rates closed at 6.2729 yuan per dollar and 6.2903 yuan per dollar, respectively. 

Chinese firms unwind their foreign exchange positions by selling the CNY to buy the dollar in Mainland China, then immediately transfer it to Hong Kong to buy the offshore CNH at a lower rate, as the spread between the CNY and CNH widens. This drives capital outflows from Mainland China and further depreciates the yuan. The PBoC may step in and start selling the U.S. dollar to keep the yuan within the 2% trading band, known as the parity rate, set by the central bank.

The euro-dollar exchange rate dropped slightly to 1.1177 dollars per euro on Monday and bounced back to close at 1.1197 dollars per euro. Forex traders are cautious ahead of the next European Central Bank (ECB) meeting in Cyprus on Wednesday and Thursday. 

ECB president Mario Draghi will unveil the details of the QE bond purchase program at the meeting. If Mr. Draghi’s plan disappoints the markets, it could send the euro-dollar exchange rate reeling on Thursday. The Spanish finance minister said on Monday that the EU and Greece are negotiating a third bailout package, worth between €30 billion and €50 billion, meaning the Greek debt crisis is back on the front burner. 

As of February 24, there are 266,552 short positions of euro FX (CME.E6), traded on the Chicago Mercantile Exchange (CME), by asset manager/institutional and leveraged funds. This is compared to about 67,763 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Short positions have dropped about 4,242 contracts from last week. 

From our technical viewpoint, a bullish ascending triangle chart pattern, that emerged in the DXY chart in January, is now signaling a breakout. A successful breakout could send the DXY to the 100-level. There are two major technical head resistances at 96.2, or 50% Fibonacci retracement and 102.16, or 61.8% Fibonacci retracement.

While the DXY is breaking out, the euro-dollar exchange rate could be heading in the opposite direction. A descending triangle break down in the euro-dollar chart could send the euro sharply lower, where the key technical support for the euro-dollar exchange rate is at 1.07 dollars per euro.