Where next for the US dollar?

December 5, 2018

Summary:

  • USD lower on the day but close to 2018 highs

  • Soc Gen calls for “tactical trades to play USD weakness”

  • Short USDJPY/USDCAD > Long EURUSD?

 

The US dollar has experienced some sizable moves in both directions in recent sessions but overall the greenback has made little headway and seems to be biding its time before making the next sustained move. There’s been a little bit of softness in the USD on the day, but in the absence of any major economic releases due to the US remembering former president George H.W Bush volatility may be diminished.  

The USD is a little lower on the day with EM currencies such as the Turkish Lira and South African Rand the biggest gainers. Source: xStation  

 

The dovish tilt from Fed chair Powell last week had appeared to be a possible game changer for the buck, with the USD index putting in a possible double top just above 97.50. However, there’s been a lack of follow through to the downside with an attempt yesterday being met with some strong buying and a long wick below the D1 candle. This Friday’s NFP report could well be decisive for the buck and tomorrow will see the ADP number released which traders often see as a pre-cursor to the main event.

The USD index remains close to its highest level of the year after large gains since Q1. The 8 and 21 EMAs have neatly captured this move higher but their recent convergence raises the possibility of a negative cross in the not too distant future. Source: xStation

 

Societe Generale Research discusses the USD outlook and flags some tactical trades to play USD weakness in the near-term:

 
  • "If the US curve flattening represents more than just an oversized short position in Treasuries, and tells us something about shifting expectations about the future outlook for the US economy, then it isn't 'good' for the dollar”

  • “We still think EUR/GBP is trapped in a range as more and more mud is thrown into the Brexit waters. EUR/USD needs to break 1.1530 to send significant positive signals, and needs some better domestic news for that to happen," SocGe argues.

  • "If we're moving to dollar softness rather than having any reason to buy the euro, we'd rather be short USD/PY, USD/NOK or USD/CAD than be long EUR/USD here," SocGen advises.

The USDJPY is falling lower of late and if the rout in equities worsens then the rising trendline going back to May could be retested. 114.20-114.55 potential resistance. Source: xStation

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