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A Dollar Recovery That Gains Traction or Flounders

A Dollar Recovery That Gains Traction or Flounders

John Kicklighter, Chief Strategist

Talking Points:

  • The Dollar's tentative recovery from a 2017-long tumble began nearly a month ago and progress is slow to develop
  • A hawkish Fed signal last month and Janet Yellen's remarks provided lift beyond mere moderation which prevailed
  • Motivation is needed to forge meaningful momentum, but can Yellen or NFPs provide this week?

Speculative futures traders are holding a heavy, net-short Dollar exposure which is both fitting and a contrarian interest among traders. See how retail FX traders are positioned for pairs like EUR/USD, GBP/USD and USD/JPY on the DailyFX Sentiment Page.

Since marking a two-and-a-half year low early in September, the Dollar has attempted a broad recovery to claw back serious ground lost throughout 2017. To this point, however, progress has been limited and conviction appropriately reserved. To gauge conviction and thereby trade potential, we should evaluate the motivation that can support the Greenback's still-nascent recovery effort. Technical traders may just wait out the momentum and assign a probability according to historical patterns or refer to market mechanics - such as speculative positioning in the COT figures for futures or retail FX measure on DailyFX. However, at the emergence and end of trends, the emphasis on fundamentals is more valuable.

There are two general means for which a trend changes through fundamental channels: either the driver that had motivated the previous course starts to reverse its polarity and motivates the same change in the asset. Otherwise, we find a more abrupt change in focus. The latter case is oftentimes the source of more dramatic reversals; however, we haven't seen a change in fundamental primacy for the Dollar such as a panicked demand for an absolute haven. Instead, the Dollar's rebound seems to be arising from the same source as its tumble through the year: monetary policy. Having seen its appeal as the first and only major central bank working to normalize policy recede as the Bank of Canada hiked twice, the Bank of England set out expectations for a 2017 hike and the European Central Bank was seen moving in 2018; the Dollar's advantage has shrunk. After the strong discount though, the Dollar seems in a better position to recover some lost ground...if motivated.

Over the past two weeks, there have been distinct fundamental triggers promoting the Dollar's rise. First the Federal Reserve's September policy meeting offered up a clear commitment through the SEP for a further (third) rate hike later this year that would expand the Dollar's yield advantage as well as signal the start of the QE reduction program. Real progress was made however when the Fed Chair Yellen remarked that the group should make sure not to move too slowly on normalizing policy. Those remarks catalyzed the critical break from the DXY Dollar Index and EUR/USD. Yet, since those remarks last week, conviction has again flagged - though gained ground has not necessarily been relinquished. The Dollar's rebound can find another charge or flounder, and drive heavily rests with subsequent fundamental event risk. Yellen's remarks on Wednesday or NFPs on Friday may cater to the correct theme. I already have exposure to EUR/USD and GBP/USD; but there are other Dollar pairs that may do well in either bullish or bearish positions. See what can drive the Dollar and what pairs look well positioned in today's Quick Take Video.

A Dollar Recovery That Gains Traction or FloundersA Dollar Recovery That Gains Traction or FloundersA Dollar Recovery That Gains Traction or Flounders

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