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Stepping back from the edge the USD

December 16, 2019 8:37 AM

It was an early Christmas present for markets last week as the U.S. and China agreed to a trade truce, Boris Johnson’s Conservative party romped to victory in the UK general election and the outcomes of the last ECB and Federal Reserve interest rate meetings for the year were as expected.

While there remains concerns surrounding the trade truce, including the lack of detail as to when and where the deal will be signed and some disappointment that the reduction of the September 1 tariffs (List 4A) on approximately $120bn in imports from China from 15% to 7.5% was less than hoped for, it does provide a sharp contrast to the backdrop from this time last year.

Back then interest rates and tariffs appeared set to rise, stocks were tumbling and global growth was slowing. A combination that set the scene for the U.S. dollar index, the DXY to trade higher throughout the first nine months of 2019.

It’s no coincidence that since the “phase 1” trade deal was first announced in mid-October along with an improvement in the economic data that indicates global growth may have bottomed, the DXY has unwound a good chunk of its 2019 rally.

Late last week the DXY appeared to be on verge of a significant technical break lower, before stepping back from the edge. While we remain medium-term U.S. dollar bears, the bounce from trend channel support 97.70/60ish needs to be respected in the short term.  

In a nutshell, while the DXY holds above the 97.70/60ish support, allow for the DXY to rotate higher into yearend towards the 200-day moving average at 97.65 and possibly towards 98.50ish before the downtrend resumes.

Keeping in mind, that should the DXY break and close below the trend channel support 96.70/60ish it would confirm the idea that the DXY put in place a medium-term tradable top at the October 2019, 99.67 high and that the next leg lower of the retracement has commenced. This would result in us entering DXY shorts, looking for a move towards initial support at 95.00, before 93.80.

Source Tradingview. The figures stated areas of the 16th of December 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.


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