Dollar weakness: enough is enough?
Fawad Razaqzada April 26, 2017 8:41 AM
The dollar has been trending lower ever since the turn of the year. This has been because of the unwinding of the bullish positions that had been accumulated before and after the US election in part as investors began to question how much of the promised fiscal spending President Trump will actually deliver and how this may impact growth and inflation, and in turn interest rates. At the same time, central banks elsewhere have become slightly less dovish, most notably the Bank of England because of a pickup in UK inflation. But the European Central Bank has dismissed the prospects of tapering its QE programme early and unless it doesn’t repeat this message on Thursday then the EUR/USD may ease back after its huge gap up following the French election outcome at the weekend. The Japanese yen meanwhile has already started to ease back as investors’ appetite for risk has improved, with the German DAX index, for example, breaking out to a new record high and US indices likewise being at or near their own all-time highs after a couple of sharp daily rises. So, is King Dollar about to turn decisively higher again?
Ultimately, the fact is this: no other major central bank is as hawkish as the Fed. This means that, fundamentally, the dollar should remain supported. The US currency will likely perform best against currencies where the central bank is still dovish, such as the Swiss franc and the euro. It may also come back strongly against the pound if inflation in the UK starts to ease back now, which could certainly be possible as the impact of a weaker currency fades. The dollar itself may get a boost from Trump’s protectionist policies, having just announced new tariffs on imports of softwood from Canada and there are reports suggestion that the US President is planning to propose a 10% tax on more than $2.6 trillion in earnings that US companies have stockpiled offshore. This so-called “repatriation tax” would help offset the impact of deep tax cuts that Trump has proposed for businesses and infrastructure spending. The net impact may well be a boost to the US economy, inflation, interest rates and in turn the dollar.
Technical traders are aware, though, that for the time being the Dollar Index (DXY) remains in a corrective phase. The failure of the DXY to hold above last year’s high at the turn of the year was the turning point in the last phase of the uptrend. Ever since, the DXY has been forming progressively lower highs and lower lows. Consequently, some of the lagging indicators such as the 50-day moving average has started to turn lower, while the 200-day SMA has started to flatten somewhat. What’s more, a long standing bullish trend line has broken down.
When you consider all the above technical developments, it is difficult to justify being bullish. But let me try.
I am bullish on the dollar not because of technical reasons, even if I am a technical analyst on paper. As discussed above, the dollar remains fundamentally supported and as long as this is the case, I will be looking for technical signs of weakness in this corrective phase of the dollar. And I THINK that we may have just seen that.
As can be seen from the chart, the DXY has repeatedly failed to hold beneath prior lows each time it broke the 100 level. We MAY be seeing a similar pattern unfollowed, this time around the 200-day moving average at 99.10 area and above support at 98.80. In fact, after yesterday’s brief break of the 98.80 support level, there has been little follow-up in the selling pressure. If the DXY were now to climb and hold above the 99.30 level, it may go on to fill the weekend gap to 100. And IF 100 fails to hold it down then we may see a rise towards the corrective down trend and possibly an eventual breakout at the third time of asking.
Alternatively, if the 98.80 support level gives way, which could certainly happen, then the DXY may drop to the next support at 97.55 next and possibly all the way to the 61.8% Fibonacci level at 96.45 before it potentially bounces back. One way or another, we will soon have a much better idea about the dollar’s next move. When the markets talk, we will need to listen.
Source: eSignal and FOREX.com.
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