“From a technical point of view, things aren’t looking too rosy for the dollar,” says Fawad Razaqzada, Market Analyst, Forex.com.
If it feels like it has been a quiet-ish start to the week for forex markets, it is because it has. But as my colleague Matt Weller pointed out yesterday, this could be the calm before the storm. Brexit-related headlines should keep sterling traders busy this evening as members of Parliament vote on a number of amendments to Prime Minister Theresa May’s bill that was rejected overwhelmingly a couple of weeks ago, while the Federal Reserve meeting on Wednesday and the U.S. employment situation report on Friday should provide more meaningful direction for the dollar and the wider markets in general.
Let’s not forget about the ongoing U.S.-China trade dispute. After the U.S. justice department decided to charge top Chinese telecom company Huawei with conspiring to violate sanctions on Iran, China has hit back and accused the United States of being “unfair and immoral” as it urged Washington to stop its “unreasonable suppression” of the company. Things could potentially flare up again on Wednesday when Chinese Vice-Premier Liu travels to Washington to speak with his U.S. counterparts, Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.
Ahead of the above events, the dollar has started the week how it ended the last one: lower. There is a good possibility that the greenback falls further later on in the week. The Fed is likely to reiterate that interest rates won’t be going up again soon and may signal that it will slow or suspend unwinding the assets it currently holds. The Fed may warn that risks facing the U.S. economy have risen due to a slowdown in growth in China and other emerging market economies, while domestically the impact of the tax-cut is fading.
From a technical point of view, things aren’t looking too rosy for the dollar ever since its sharp fall on Friday, when it more than gave up its gains made the day before (see chart below). The reversal saw the Dollar Index break support around 96.05 – this level is now the most important short-term resistance to watch.
Source: TradingView.com.
Friday’s selling pressure came in around 96.50, which is roughly where the 61.8% Fibonacci retracement against last year’s high converged with the now downwardly-sloping 50-day moving average (see chart below). The slope of this moving average is an objective warning sign that the bullish trend may be over. Subjectively, one can also see a bearish channel forming. Within the channel, the DXY has been putting in a few lower lows and lower highs.
Source: TradingView and FOREX.com
So, the technical outlook on the dollar doesn’t look too great at the moment. However, the dollar bulls would argue that the current weakness is just a retracement of the large gains made last year. Indeed, the DXY hasn’t even reached the shallow 38.2% against last year’s low yet. Therefore, that the current bear channel may turn out to be a long-term bull flag pattern and that a potential break above the resistance trend of it would be the trigger.
Both the bulls and bears have equally compelling points on the direction of the dollar. We can help settle the argument simply by stating that the bears have the upper hand right now, but how long they will be able to retain control is up for debate. As things stand, we remain bearish on the DXY for as long as it holds within its channel and ideally below the key 96.05 resistance. As such, we expect the index to make a new low for the year in the coming days below 95.03 it hit earlier this month.
