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The US Dollar Index sank to new lows today in Asia, finally breaking out of a tight range we highlighted last week. The straw that broke the camel’s back will always be up for debate, but it’s fair to say more than a few forces have worked against the Greenback this week.
IMF’s upgrade for global growth is a net positive overall, yet it doesn’t bode well for USD bulls whilst they suspect US growth will lag behind its’ peers on a relative basis. Trump’s new import tariffs have been met with scepticism at home (from both politicians and businesses) with claims it will hinder growth, employment and inflate consumer prices. Politics and conspiracy theories have continued to erode confidence in the Whitehouse’s ability to govern (perhaps long-term). With reports that Attorney General Jeff Sessions has been interviewed in the Mueller probe and rumours that recently indicted Rick Gates is negotiating a deal with Mueller’s team, the Russia investigation is simply not going away.
And with Trump due to talk at Davos (where he can literally say anything he feels like) and NAFTA talks lingering in the background, traders have not been short of reasons to be sceptical about the Dollar this week. And that’s before we get to the technicals.
Technically, it is hard to be overly optimistic with the Greenback if we look at the weekly chart. The original break beneath 91.01 provided a technical sell-signal for Dow Theorists, and bearish momentum since the Dec ’16 high is also increasing as the grizzly trend accelerates. And whilst there is a bullish divergence forming, we are yet to see any signs of a base on price action itself.
Today’s break lower from compression suggests range expansion is unfolding and the dominant trend is now back in control. As we seek to capitalise on the relationship between compression and expansion, we’re now monitoring to see how this expansion reacts at support.
How price reacts around the 2009 and 2010 highs are key going forward. With GBPUSD and NZDUSD breaking to new highs and EURUSD tantalisingly close to following their lead, traders likely feel spoilt choice if momentum strategies are their thing. And whilst AUDUSD has so far been hesitant to break its respective high, if data is to favour Australia on a relative basis then it could more than likely follow. This of course assumes that DXY does not rebound from the 2009 high. If we are to see profit taking around 89.62, we could see prices capitulate form the lows and create whipsaw reaction across FX majors. But if prices decide to cut through it like butter, who are we to argue with a trend?
So we’re not even half way through the week and the drivers which sent USD lower remain. We also have the first ECB meeting of the year tomorrow, where traders are eager for clues over ECB tightening. (Anything less could knock EURUSD lower and send DXY higher). And, assuming the government shutdowndidn’t impact the growth department, Q4 GDP should be released on Friday form the US.
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