Core reasons why more losses are feasible in US dollar

US dollar index registered 5-daydecline yesterday, which is most in the past few weeks. US dollar is tradinglower against almost all major currencies, including the euro, pound, AUD, CHFand Japanese yen. Most major currency pairs are trading around criticalbreakout levels, which is one of the main reasons why more losses are possiblein US dollar. The dollar index itself is nudging critical level and possess areal risk of a major breakdown.

Key Talking Points

• US dollar index testing key pivotal zone
• Cable threatening to break multi-year highs above 1.6830
• Euro eyes all-important 1.40 figure again
• USDJPY at a critical juncture, 101 holds the key
• Contrarian sentiment-based strategy – Traders are buying aggressively into US dollar weakness, which can result into more losses

The aforementioned points suggesthow further losses could lead to a collapse in US dollar. Technically, USdollar index is nudging around an important confluence area of two crucialtrend lines. These two trend lines are connecting almost all the previous majorlows on weekly timeframe. These trend lines acted as a support numerous times. So,a break and close below 79.00 level might be considered very bearish for thedollar moving ahead. If bearish sentiment surrounding thegreenback gathers pace, then the dollar remains at risk of a major breakdown.

Fed won’t mind losses in USdollar

The fact of the matter is that incurrent market conditions almost every central bank wishes their currency totrade lower. Considering the recent dovish Federal OpenMarket Committee (FOMC) meeting minutes the Fed made it very clear thatthey are in no hurry to jump into rate hike expectations, which could furtherlead to more sustained losses in US dollar.  

ECB’s reluctance to do more

The European central bankrefrained from acting again in the last meeting, which acted as a catalyst forthe euro, and in turn weakened US dollar. According to Reuters, ECB Executive Board member Peter Praetsaid during a meeting organized by The Economist that “despite lower thanexpected inflation in the euro zone forseveral months in a row, consumer price developments were still within the banks base-line scenario”. This means ECB seemsto be no urgency to use tools such as negative rates or QE, which could possiblyignite further bullish sentiment for EURUSD pair.

UK to grow further

There is no denial of the factthat recovery in UK is on the right track, which could lead pound to gainfurther against the dollar. International Monetary Fund recently predicted UKwill grow faster than other advanced economies this year, according to theguardian.

Overall, it’s the marketsentiment which can drive the dollar moving ahead, and investors need to becareful while buying aggressively into US dollar weakness.