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Dollar: Technical Attraction in Dangerous Times

Dollar: Technical Attraction in Dangerous Times

John Kicklighter, Chief Strategist

Talking Points:

  • Liquidity - or the lack there of - is still the most important consideration of the financial landscape
  • The Dollar put in for a sizable decline - relative to the virtual standstill the rest of the market - amid notable data
  • While the DXY Dollar Index has not feigned critical breaks or trends; GBP/USD, AUD/USD, NZD/USD and USD/CAD offer tempting pictures

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Technical traders are always going to find appealing patterns in a market that has as many options as the liquid FX market. Yet, those setups we come across don't always make for good trading opportunities by themselves. Fundamentals often play a critical role in whether the shape of an good trade evolves into one that is fully fleshed. And, particular conditions like liquidity always hold sway over these situations. We have seen the vague outline of interesting opportunities pop up on the radar in the form of Dollar-based pairs. The DXY Dollar Index itself has not breached any remarkable technical boundary or set out the lines for redefining a trend, but it did see a meaningful level of activity this past session - at least for the present holiday conditions. The Wednesday drop was sharp relative to the past four trading day's extremely tight ranges, but there were few key levels in the vicinity to take it the next stage on a technical basis. For some of the crosses, that upgraded milestone was met.

Looking to GBP/USD, we find the wedge that had been tightening over the past month was forced into a bullish break the past session. Typically, a conservative approach to a loaded technical pattern like this would be to trade the clearance with an objective of - at most - the high of the preceding pattern. Yet, it is a low probability that we even hit that modest goal under current conditions. Markets are simply too thin to mount a meaningful rally for the Cable. It is possible that with the proper application of fundamental leverage, that liquidity shortfalls could be temporarily overcome. The Conference Board's release of consumer confidence for December reflected on an important theme and it did come in weaker than the previous reading. Overall though, the series is still reflecting an exceptional pace of growth and anticipation for wages to contribute to inflation - thereby feeding rate hike potential moving forward. This confusion in the data and ultimately misalignment to the price move translates into a poor driver regardless of the liquidity conditions.

Forcing a breakout into a productive movement after the key charge is extremely difficult in our present conditions. Extending an existing move is far less so. On that point, both AUD/USD and NZD/USD extended impressive advances through the past session. Trends are arising from both - the latter of which I had been watching closely every day leading into and after the critical break of an 'inverse head and shoulders' pattern. Nevertheless, the laws of liquidity still apply. While both pairs are climbing against the odds, their persistence moving forward is still a low probability affair. If I were to break with probabilities and my rules for this instance, what would keep me from doing so in the future and eventually reaping the detriment of contradicting chance? Then there is USD/CAD. The pair has come upon a meaningful range floor from the past two months which happens to coincide with a decades-long range mid-point around 1.2625. A hold is the path of least resistance. The range itself is little more than 200-250 pips. Here, the situation may find better balance, but is it still a 'good' trade? I weigh that and the Dollar's actions in this Quick Take video.

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Dollar: Technical Attraction in Dangerous TimesDollar: Technical Attraction in Dangerous TimesDollar: Technical Attraction in Dangerous TimesDollar: Technical Attraction in Dangerous Times

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