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DXY Index Holds Ground Beneath Resistance Despite New Tariffs

DXY Index Holds Ground Beneath Resistance Despite New Tariffs

2018-08-08 12:35:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- The US Dollar continues to stall below key resistance, and its breakout efforts today were hampered by news of new retaliatory tariffs coming from China.

- A close through 95.53 is still critical before a bullish breakout for the US Dollar begins.

- Positioning shifts have seen the crowd get more bullish on both EUR/USD and GBP/USD, a contrarian signal calling for more US Dollar strength.

See our longer-term forecasts for the US Dollar, Euro, British Pound and more with the DailyFX Trading Guides

The US Dollar (via the DXY Index) has thus far failed to breakout of its consolidation to fresh yearly highs, and the news flow through the first half of the week has been less than helpful in getting us there. The latest impediment came in the form of new retaliatory tariffs from China, announced within the last hour.

The 25% retaliatory tariffs on imported US goods to the tune of $16 billion is just the latest development in the seemingly 'tit-for-tat' trade war. But with the Chinese Ministry of Commerce saying that it has been "forced to retaliate" against "US tariffs [that] are very unreasonable," it doesn't sound like the recent signs of de-escalation are bearing fruit.

As market participants digest the new round of tariffs, the US Dollar finds itself maintaining its trajectory for a potential breakout to new highs. Helping the cause has been a persistently weaker British Pound over the past few weeks, which is now at its lowest level in a year versus the US Dollar and its lowest in nine months versus the Euro.

Signs that UK Prime Minister Theresa May is losing the confidence of her constituents, and thus, the rising odds of a 'hard Brexit' outcome are proving too difficult of pills to swallow for Sterling bulls. The developments around the May government in recent days speak to the concerns Bank of England policymakers issued last week when they postponed any further rate hikes until the Brexit issue is resolved.

DXY Index Price Chart: Daily Timeframe (July 2017 to July 2018) (Chart 1)

DXY Index Holds Ground Beneath Resistance Despite New Tariffs

So, for now, the six-week long DXY Index consolidation remains intact after the recent failed attempt at a topside breakout. We're awaiting a close above 95.53 (the June 21 bearish key reversal and the June 27 to 29 evening doji star candle cluster highs) to confirm that the recent price congestion is ending. For confirmation, a move below 1.1510 in EUR/USD is necessary to confirm the DXY Index breakout.

Read more: DXY Index Struggles to Achieve Topside Breakout

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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