As the dollar collapses, what are the key levels to watch?
The story of the week has to be Wednesday’s slide in the US dollar, which really started on Monday as you can see in the US Dollar Index daily chart below. It looks like the dollar is developing a trend of falling sharply in the first week of the month as you can see in December, January and now February!
This morning Bloomberg ran the following report:
‘US dollar suffers worst day in 7 years on signs of slowing economy. The US dollar plunged on Wednesday (Feb 3) by the most since the Federal Reserve announced the start of its Treasury bond-buying programme seven years ago, as signs of a slowing US economy helped derail bets on diverging policies between global central banks.’
The article notes that the dollar slid 1.7% to 117.90 yen, erasing all the gains made since the Bank of Japan’s surprise 29 January move to negative interest rates on certain deposits. I had thought that negative rates would put a floor under USD/JPY, but clearly that is not the case.
The financial news often makes no sense to me and yesterday, as worries over the strength of the US economy hit the dollar, the US stock markets actually rose. This was because the weak dollar helped push oil higher, and higher oil, I guess, means the economy is not in such bad shape? I hope you can make more sense of it than me, but I’m only a technical analyst!
The Dollar Index has broken back below the 100-day moving average (the blue line) and the 200-day moving average (the red line) for the first time since October. We also saw the index below the important 200-day moving average in August, September and October last year, but in each of these three months the dollar staged a quick recovery. The last time the index held below this important marker was from September 2013 to May 2014.
However it is not as dramatic as it sounds. If you look at the daily chart going back exactly one year you can see that we have trended sideways for 12 months from a high initially of 100.39 down to a low in August at 92.62. Most of that move was a back-and-forth trend, not a steady downward move. So even as the debate over higher rates raged on and on last year the dollar did not really go anywhere. From mid-October we saw a recovery to re-test the 2015 high of 100.39 which was beaten, only just, in early December as we hit 100.51, just before the long-awaited rate rise happened. All we have done this week is move back towards the middle of the range, albeit very sharply.
This week we wiped out the slow recovery we saw from the December low to the January high so it has been a big move, but only in the short term. The 200-day moving average is at 96.85 and, just below this level, 96.56 represents a 50% correction of the rally from the August low to the December high. So the 96.85/96.56 area is now the place to watch.
A break below here could take us down another 100 pips to the 61.8% Fibonacci at 95.64. A break below the July low at 95.45 would be a further negative signal and could target 94.40/30.
If we see a strong nonfarm payrolls number tomorrow bulls could be saved and a weekly close above 96.85 could been seen as positive in the short term. The December low at 97.19/22 is important but the 97.40/50 area is the one to watch on any recovery. This is a Fibonacci level and also happens to be today’s high. If we were to close above here tomorrow night this would be encouraging for bulls into next week and they will look to re-target the 100-day moving average at 97.80/90.
Looking much further ahead at the weekly chart (above) for patterns and clues, one could argue that this is a big double top pattern which would signal the top of the rally and big risks to the downside. However to me this looks more like one big bullish flag formation. In which case, if we were to see a sustained break above 100.39/100.51 sometime this year, we could have a big rally over the following six-month period.
Technical Analyst & Trader
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