A dip in the US Dollar Index is a buying opportunity for investors
There have been several key developments in the forex markets so far this month, some of which have seen currencies buck their trend.
Perhaps the most interesting has been the performance of the US dollar. I have been an advocate of a stronger dollar, and while that view finally materialised in August, the move has been very short lived. The US Dollar Index has closed lower three weeks out of a possible four this month - a period that has seen the Index drop from 95.40 levels to the current 93.60 handle.
Fundamentally, we have seen a lot of hot money flowing back into risk as the US-Sino trade war story starts to peter out. We had Donald Trump announce another round of tariffs on $200 billion worth of Chinese goods, however, the aggressiveness towards the proposed hikes – with 10 per cent set to kick in from next month and another 25 per cent next year – has seen markets shrug off the news as market participants adopt a risk-on approach.
The move lower has by no means changed my views on the dollar trend, I see this dip as an opportunity for buyers to come in before we see a move higher back towards 96 next month. The logic is simple: USbacked assets offer the highest level of safety and security while also offering a higher rate of return due to higher US interest rates. It’s a combination that gives me confidence that as long as the US central bank is at the forefront of rate hikes, we should see an in-demand dollar. The US data docket continues to impress – buoyed by the holy trinity of upward inflation, improving output and a strengthening labour force. These metrics all but guarantee the Federal Reserve to deliver its third rate hike this year today. While this move is pretty much priced in – watch for how the voting changes within the Federal Open Market Committee with regards to future rate hikes.
In June’s meeting, eight members foresaw up to four hikes this year and if we see additional members upgrading their projections this could respark the dollar rally through the start of October.
It remains difficult to predict the outcome of such votes; while the stellar US data docket hints at a hawkish FOMC, the lingering trade wars story – coupled with political uncertainty – could taper Fed expectations. As a result, it would prove prudent to await the outcome of the projections before building any near-term dollar-related strategies.
Regardless of the outcome of the Fed meeting today – technically there will be buying support coming into the index between 92.80 and 93.20 levels in the weeks ahead.
I am also keeping an eye on tomorrow’s US GDP print. We have seen robust gains in this number of late, however I don’t expect a reading above 4.2 per cent. The other surprising story this month has been the positive turnaround for the euro. The Dubai Gold and Commodities Exchange EUR/ USD contract has popped to more than three-month highs. There has been a fresh round of buying in the common currency on the back of improving fundamentals, while the European Central Bank has committed to no rate changes through next year, they did announce a 50 per cent taper on the current bond-buying programme from next month and this has sparked optimism.
Earlier this week, ECB President Mario Draghi continued the hawkish rhetoric when he noted that euro-area inflation is “expected to increase further over the coming months” on the back of wage growth. This saw the EUR/USD take out a very strong resistance level and trade above 1.18 levels. Fundamentally, we do not expect to see many fireworks in Europe – but keep an eye out for a reading of business climate and euro-area consumer confidence due out tomorrow to truly gauge the optimism. Mr Draghi will be speaking again and this could see another bout of euro buying.
Technically, the move could be a cause of concern for euro shorts as the currency is looking strong after taking out both the 50-week and 50month moving average, and crushing through the 200-daily exponential moving average. A weekly and monthly chart would show a clear head and shoulders pattern forming which would suggest a break down back towards 1.11 levels. However, judging by the recent pricing action, expect to see a move upwards towards 1.19 levels where I expect this recent euro rally to fade between 1.19 and 1.2070 levels.
The British pound bulls were stopped short in their tracks as the sterling fell back towards 1.31 levels on the DGCX. The uncertainty and fragility of Prime Minister Theresa May’s position amid the recent Brexit negotiations have shaken the pound. Bank of England governor Mark Carney is set to speak tomorrow, which will see volatility in pound-linked asset classes, and this is followed by the UK GDP reading due out later this week. Expect upsides in the GBP/USD to be capped at 1.33 levels with initial support coming in at 1.30 levels before 1.27 levels get exposed.
And finally, while opportunities seem to lack inspiration in gold – expect strong support at 1,194 levels while upsides are capped at 1,220 levels. Meanwhile, the Indian rupee continues to trade near lifetime lows against the dollar. Expect that figure of 73 (equivalent to 136 on DGCX’s INR/USD contract) to hold as a strong psychological support in the short term. This would represent a nice level to potentially build long positions on a short-term view.
US-backed assets offer the highest level of safety and security and a higher rate of return due to higher interest rates