USD pausing or failing

Frustratingly for FX traders, the U.S. dollar index which recently broke higher and traded at its highest level in 2 years, has failed to capitalise on last week’s break.

The lack of U.S. dollar upside follow through, was firstly the result of the U.S. Q1 GDP report on Friday. On the surface, the headline number of 3.2% growth QoQ was impressive however, it did mask weakness in consumer spending, as well as concerns that unsustainably high exports drove the rise.

This was followed overnight by another soft inflation number. Core PCE, one of the Fed’s preferred measures of inflation printed flat in April, which resulted in the year on year number fall to an 18-month low of 1.6%. At this rate, there is no immediate end in sight to the low inflation conundrum we wrote about last week here: https://www.cityindex.com.au/market-analysis/au-cpi-in-focus/

The U.S. dollars pause is something to keep in mind given recent CFTC data confirmed that the market continues to add to its U.S. dollar long position, mostly against the CHF, EUR and JPY. The market is currently sitting on U.S.$32.6bn of net U.S. dollar longs, the largest since December 2018. For a reminder as to what happened back in December 2018, I have highlighted the almost -2.75% fall in the DXY index on the chart below.

Now that’s not to say we are expecting the same to happen this time around. However, we do see the U.S. dollar, as being delicately balanced ahead of the plethora of Tier 1 U.S. data due for release this week, including ISM manufacturing PMI, FOMC and employment data. Not to mention the ongoing backdrop of U.S. – China trade talks which kick off again today in Beijing.

Providing the DXY index holds on a closing basis above the strong band of horizontal support 97.70/50 then the price action of the past few days is likely to be a “pause” before the uptrend resumes. However, should the DXY break and close below the support zone at 97.70/50, then it is an indication the U.S. dollars breakout has failed again in the short term and a possible trigger for a position unwind such as the one witnessed in December 2018. 

Source Tradingview. The figures stated are as of the 30th of April 2019. 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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