Talking Points:
- Looking across the major crosses for a currency, we can establish whether the unit is inherently active or reactive
- Filtering pairs to see which currencies are actually active can put us on to more productive market moves
- We look at the Dollar, Euro, Pound, Yen and other majors for their individual performance Tuesday
See the DailyFX Analysts' 3Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.
Depending on what Dollar-based major pair you were looking at this past session, your assessment of the Greenback's performance could have been dramatically different. EUR/USD was little changed while USD/JPY posted a remarkably two-day rally and the Dollar plunged versus the British Pound (GBP/USD). This is owing to the reality that the benchmark currency was not finding self-directed momentum Tuesday; but rather it was being guided by far more active counterparts. It is important to identify where the drive for a pair is originating - both technically and fundamentally. Without that knowledge, it is far too easy to jump into moves that are destined to immediately fizzle out.
If we look at the USDollar or DXY Dollar indexes, we find a general but limited view of where the activity is in the market. The former showed the Greenback sliding meaningfully on the day while the latter was little changed. DXY was little moved because it heavily weights EUR/USD which offered little progress. USDollar mixes strong moving pairs that projected offsetting moves. Looking at the major Dollar crosses one-by-one, we would recognize that the currency was generating little of its own momentum and instead was jostled by stronger peers like the Pound and Yen.
When we identify that there isn't a broad motivation behind the Dollar - bullish or bearish - we recognize the limitations in its trade appeal. We can also identify where the momentum truly is and identify the true opportunities. That doesn't necessarily mean that the rally from the Pound and Yen crosses highlights a lasting trend, it could just as readily present a temporary swell in volatility that presents a fade opportunity. However, we nevertheless trace back to the true genesis of activity which we can then evaluate for its fundamental spark and conviction. We discuss how you can filter out activity in the FX markets in today's Strategy Video.
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