Dollar unlikely to go down without a fight

Financial markets opened in a bit of a panic mode overnight in the wake of Trump’s failure to repeal Obamacare. Stock index futures slumped while the dollar index fell to its lowest since mid-November as the yen and euro both gapped higher. The dollar’s losses steepened after the London open as the GBP/USD climbed to near 1.26 handle and EUR/USD neared 1.0900. European stock indices bounced off their lows slightly.

It is not the failed healthcare bill itself that has caused all these market moves. Yes that may well have been the trigger, but investors are worried about the challenges Trump will face in trying to get his other policies passed which may well limit the government’s fiscal spending. The worry is that not only will this weigh on GDP, but potentially on inflation too. Thus, the Fed may not raise interest rates as aggressively as had been priced in, hence the falls in the dollar.

Well, that’s all good in theory, in reality things may turn out very differently. Market participants may well be overreacting a little, just like they did at the end of last year to ‘Trumpflation’ euphoria. Indeed, the markets often overreact and price in the worst – or best – case scenario. Therefore, things could well look a lot different by the end of the week. That being said, I am not implying that the dollar and/or stock markets cannot fall further. But I do think that in the case of the dollar at least that it will bounce back soon, but I am less sure about stocks.

The greenback remains fundamentally supported by a hawkish Fed, and generally dovish central banks elsewhere. With political risks facing the European Union – UK government’s triggering of Brexit Article 50 in midweek and the upcoming French elections in April – the EUR/USD and GBP/USD may remain under pressure for some time yet, even if both have looked strong in recent weeks.

From a technical point of view, the Dollar Index has now reached the first of our previously noted support area around the 98.65-99.05 region. This is where old resistance meets a bullish trend line and the 200-day moving average. We could see at least a short-term bounce here. However, with the neckline of the Head and Shoulders pattern broken, the dollar may suffer from further momentum technical selling pressure. Thus if the above support area breaks down then the DXY may drop to our second noted key support at around 97.55. This level was also a previous resistance level and it ties in with the point D of an AB=CD price move.

Therefore, the dollar’s down days could be numbered, before it potentially resumes its long-term trend. But even if the long-term bullish trend has ended, I just don’t think the bulls will go down without a fight. And as the DXY is testing or nearing key long-term support levels, that’s why I think the bulls may start to emerge once again soon. So, as a minimum, I am expecting to see a noticeable bounce for the dollar. We are now on the lookout for potential technical bullish signals to emerge either on the dollar index itself, or one of the key dollar pairs: EUR/USD, GBP/USD or USD/JPY.