The U.S. 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 while they suspect U.S. 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 White House’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 U.S. 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 December 2016 high is also increasing as the grizzly trend accelerates. And while 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 capitalize 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 GBP/USD and NZD/USD breaking to new highs and EUR/USD tantalizingly close to following their lead, traders likely feel spoiled choice if momentum strategies are their thing. And while AUD/USD 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 halfway through the week and the drivers that 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 EUR/USD lower and send DXY higher). And, assuming the government shutdown didn’t impact the growth department, Q4 GDP should be released on Friday form the U.S.