Dollar bulls hoping for some respite near term

Another day, another President Trump broadside. No, we’re not talking about the wall, NAFTA and bad jokes, but the interview the President gave concerning China. In a ‘nutshell’, Trump is considering a big ‘fine’ over China’s intellectual property theft and there is now much speculation that Trump will use his State of the Union address at the end of the month to announce several trade measures to punish China. Interestingly, it was only yesterday that the President stated that China now stopped short of meeting the criteria for currency manipulation. This remember was one of his big election campaign policies, so Trump is now beginning to ratchet up trade war tensions.

The effect on the dollar if any type of trade conflict kicks off cannot be overstated and yet, as we all know, the POTUS is prone to sabre-rattling and not following through on his threats. It’s obviously the last thing dollar bulls want to hear right now having been beaten down last year and the start of this. There are also government shutdown fears this week to contend with.

Interestingly, dollar index traders are heavily positioned for more downside, just off the most bearish positioning in futures markets since mid-2014. And in many ways this shift from extreme bullishness at the start of 2017 to bearishness does offer some succour to bulls as it offers a good contrarian signal. Similarly, US 10 year yields are hitting highs above 2.60% for the first time since March 2017, whilst Fed funds are pricing in an 88% chance of a rate hike in March with a now greater than 50% chance of three hikes in total this year.

We can see the dollar decline quite clearly on the daily candle chart. Buck bears smashed through 2017 lows last week selling USD and buying EURs on the back of positive steps forward in the German political situation.

What has grabbed our attention on DXY has been the price action this week. We printed a bullish reversal bar yesterday which can be a major reversal pattern if the market is in a downtrend for a considerable period of time. The 90.20/40 zone has also supported prices for the whole of this week so far. Key levels to watch are the 2017 lows around 91.00 which match this week’s highs so this area is now key resistance. On the downside, the March 2009 high is significant at 89.62. It’s difficult to call the bottom of the dollar decline but we will be looking to see whether the price action this week can support prices in the short-term.