US dollar retreat continues

The dominant theme for forex markets since April of this year has been the ascendancy of the U.S. dollar which last week as measured by the DXY Index, reached its highest-level since June 2017. Since that high point, the U.S. dollar has spent the past 4 sessions trading lower, causing some traders to re-evaluate their bullish dollar stance.

It’s important to remember that interest rate markets and the expectations for future moves in interest rates are an important driver of currencies. In the U.S., interest rates which hit a record low of 0.25% in 2008 have been rising since December 2015. This pattern continued in 2018 with interest rate hikes in both March and June to leave interest rates sitting in the middle of a band between 1.75% and 2.00%. Another rate hike in September is fully priced and the market has ascribed around 50-50 odds of a second increase by year-end, as well as a further one-and-a-half rate hikes in 2019.

Overnight it was reported U.S. President Donald Trump was “not thrilled” by the prospect of further interest rate hikes from the Federal Reserve as it would likely cause the U.S. dollar to rise further and potentially undo all of the “good” work his administration has undertaken to boost the U.S. economy. Given that inflation, which sits at 2.9%, is at its highest levels in six years and that unemployment at 3.9% sits at 20 year lows, its unlikely that the Federal Reserve under Chairman Jerome Powell would seriously consider not further tightening monetary policy.

The timing of Trumps disapproval comes at a sensitive time just a few days ahead of this weekend’s Jackson Hole Symposium at which Powell is scheduled to speak. Additionally, the latest Commitment of Traders report showed leverage funds long U.S. dollar positions now exceed U.S.$30 bn, the highest level since December 2015.

In this article we wrote just a few days ago https://www.cityindex.com.au/market-analysis/finding-sense-in-mayhem/ we outlined our expectations for an imminent pullback in the U.S. dollar based on a technical analysis technique known as Elliott Wave. The view was that the U.S. dollar as measured by the DXY, was very close to completing a five-wave rally, which would be followed by a corrective pullback, before the uptrend resumes.

With the pullback now well underway, the question is how far can the current corrective pullback extend?

The first level of support which comes from the highs of June and July 95.65/55 area has now been reached and held thus far. However, the U.S. dollar still needs to negotiate the minutes of the recent FOMC meeting released Thursday morning and ahead of Jackson Hole there remains a strong possibility of a further flush of weak U.S. dollar long positions.

Should the DXY register a daily close below 95.40ish there is then scope for the DXY correction to deepen towards the confluence of support which includes the July low of 93.71 and the 38.2% Fibonacci retracement at 93.66.

Source Tradingview. The figures stated are as of the 8th of August 2018.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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