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Will the Euro and Pound Trigger the Dollar’s Tumble?

Will the Euro and Pound Trigger the Dollar’s Tumble?

Talking Points:

  • The DXY Dollar Index was capsized to end this past week to a three-year low and on the verge of a critical technical collapse
  • Fundamentally, the Greenback is relatively balanced in value between monetary policy, risk trends and economic outlook
  • As was also the case in 2017, the Dollar's strongest weakness was the remarkable strength of its peer - specifically Euro and Pound

What is the 1Q fundamental and technical forecast for the US Dollar? Are DailyFX analysts interested in any Dollar-based exposure as top trades for 2018? Sign up for the 1Q forecast and Top Trades guides on the DailyFX Trading Guides page.

The Dollar is dangling over the edge of a technical cliff. Take a look at the ICE's Dollar Index (DXY) chart and you find the benchmark currency at a three-year low and level with a support that is the confluence of years of consolidation and a high time-frame Fibonacci level (38.2%) pulled off of the 2008 to 2017 bull trend. If you are a riskier disposition, you may already consider this a critical breakdown with implications for serious follow through. Even if you are of the more conservative bent - like myself - this situation has the greatest potential to topple into a full scale reversal with the proper motivation. Before we consider the nature of the opportunity and its circumstances, it is first important to remind ourselves that there are few critical breaks with follow through, full tilt reversals and/or major trend extensions out there. While we may have some very high profile exceptions like US equities, it is not the norm. That speaks to the lack of conviction that plagues us between complacency-driven exposure and historically low returns. That should be a top consideration for our Dollar exposure ambitions.

Now, what sent the Dollar further into its tailspin to close out this past week? Was it response to fresh political scandal, a collapse in interest rate expectations or blow back from protectionist shift? No. This didn't seem to originate with the Dollar at all. If we at an equally-weighted index (or assimilate the picture in our mind by viewing its many crosses, but frankly this is easier), you find that while it was sliding, the ominous levels vanish. The Greenback's true shortfall is its lack of kinetic influence. It is adrift with no strong fundamental charge to jump start its performance which leaves it open to liquid and motivated counterparts. The Fed's rate forecast has been processed to death, growth expectations have held a modest take for years and political uncertainties are offset by promise for programs like infrastructure spending. Yet, where the Dollar remains in a holding pattern; some of its largest counterparts are starting to regain their footing at its expense.

Through 2017, the Dollar was persistently under pressure moreso due to the strength of counterparts like the Euro which found appeal through speculation - albeit very early - that the ECB was considering policy normalization to back off from emergency stimulus. That and other themes have built up over time. To end this past week, two of the most liquid counterparts to the Dollar - the Euro and Pound - charged higher independently. And collectively, it dealt the heavy blow to the world's most liquid exchange. News that the German Chancellor may have paved the road to a stable coalition government added buoyancy to the earlier news that the ECB minutes signaled a possible change in policy is due relatively soon. The result was EUR/USD clearing the midpoint of both the 2014 to 2017 range as well as the same percentage of its historical range since the Euro started trading in 1999. For GBP/USD, reports that two prominent EU members were pushing to work a deal that would support a soft UK Brexit deal heartened the Sterling across the board. Yet, it was the Cable with the big technical drive above 1.3600. The question now is whether there is enough drive to make something out of these breakouts and in turn send the Dollar to the depths? We discuss that in this weekend Quick Take Video.

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