Talking Points:
- The DXY Index is barely higher at the start of the week, holding onto gains as little progress was made on either the Brexit or Italian budget fronts over the holiday week.
- Meanwhile, traders are hoping for a deal at the G20 meeting this week to resolve tensions in the US-China trade war.
- Retail traders continue to fade advances by the US Dollar, leaving EUR/USD and GBP/USD with bearish outlooks.
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The US Dollar (via the DXY Index) has started the week off on slightly firmer ground, up by less than +0.1% at the time this report was written. The return of liquidity to markets has produced cautious trading conditions as some of the pre-holiday week issues continue to linger: Brexit appears ready to go off the rails at any moment; the Italian budget saga persists; and energy markets remain in meltdown mode.
While the US Dollar has been arguably a bystander to many of the significant trends that have emerged in recent weeks, the coming few days should see the greenback reassert itself as a prime driver in FX markets. Even though the first two days of the week are quiet on the economic calendar - not dissimilar from the other major currencies - the second half of the week promises several significant developments to transpire.
On Thursday, the November FOMC meeting minutes will be of interest given the recent move in energy markets. The combined impact of a stronger US Dollar (the DXY Index is just off yearly highs) and plunging Crude Oil prices portends to a softer inflation environment in the near-future, which may given the Fed reason to reassess its rate hike cycle (the speech by Fed Chair Jerome Powell on Wednesday may also hint of this shifting perspective). This is a significant risk to the US Dollar, as we first noted in the "Markets after the US Midterms" special report: rates markets are pricing in the end to the Fed hike cycle in 2019.
The main attraction for the week comes on Friday, however, when the G20 conference convenes in Buenos Aires, Argentina. US President Donald Trump and Chinese President Xi Jingping are due to meet on the sidelines in what is perceived to be an effort to end the US-China trade war. We've seen a lot of false starts to end the disputes, and it's possible that this is another 'buy the rumor, sell the news' type of situation. But with the economic impact starting to become more evident for both China and the US, now may be the time to strike the iron.
DXY Index Price Chart: Daily Timeframe (January to November 2018) (Chart 1)
The technical structure for the US Dollar remains bullish, even if the fundamental outlook has soured; it may just be a matter of time before price action begins to reflect the changing underlying fundamentals. Even though price is still above its daily 8-, 13-, and 21-EMA envelope, both Slow Stochastics and daily MACD continue to decline, suggesting a loss of upside momentum. Failure below the November 20 outside engulfing bar at 96.04 would signal the turn.
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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
