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Can the Dollar Mount a Lasting Recovery without EUR/USD?

Can the Dollar Mount a Lasting Recovery without EUR/USD?

John Kicklighter, Chief Strategist

Talking Points:

  • So far this week, USD/JPY, AUD/USD, GBP/USD and NZD/USD have put in for notable technical breaks in the Dollar's favor
  • EUR/USD, however, has yet to clear critical support around 1.2150 which happens to coincide with the DXY's hold at 91
  • As we await any signal of break, can a bull trend for the Greenback exist without EUR/USD tumbling and how can that aid trading?

What do the DailyFX Analysts expect from the major currencies, equity indices and commodities through the 2Q 2018? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

Dollar Has Made Some Critical Technical Breaks

Interest in the Dollar has increased dramatically this past week as an otherwise measured rally for the currency has translated into some otherwise remarkable technical breaks among the crosses. Across the noteworthy moves, the USD/JPY offered up one of the most technically decisive moves. From a robust bear trend to weeks of congestion, we transitioned into an inverse head-and-shoulders breakout this week to leverage the appeal of candlestick / pattern traders. In terms of sheer girth, the AUD/USD's strong three-day drop below 0.7630 cleared the support on a rising trend channel more than two years in the making. Far less dramatic and with less time under their belt, the GBP/USD put its persistent bull trend into a bind dropping back below 1.4200 while the NZD/USD dove below 2018's range on the back of a hearty six-day tumble. These are all significant moves, but their technical relevance is more of an initiating development rather than the establishment of trend. If the Greenback is intending a more comprehensive run, we will likely need to draw influence from a more systemic source.

Can the Dollar Mount a Lasting Recovery without EUR/USD?Can the Dollar Mount a Lasting Recovery without EUR/USD?

EUR/USD Has Notably Held Back Along with DXY

The Aussie and Kiwi Dollar based majors represent particularly small percentages of total USD trade. In terms of scale, the Yen and Pound trade positions as the second and third most liquid counterparts against their US counterpart. However, they collectively still pale in comparison to the influence that EUR/USD represents. This benchmark pair is the core for the Euro and Dollar individually, but is further a critical measure of the FX market and even global capital flow itself. Given the scale this pair represents for the Greenback, it is unlikely that we would have a true recovery mounted without EUR/USD triggering its own bearish break down. Yet, the benchmark pair has seen a clear hold above 1.2150 - the general midpoint on two very prolific technical milestones: the midpoint of the 2014-2017 range as well as the historical reach of the pair since the Euro's inception.

Can the Dollar Mount a Lasting Recovery without EUR/USD?Can the Dollar Mount a Lasting Recovery without EUR/USD?

As Far as Technical Milestones Go

There are pretty clear levels to track when it comes to establishing the next phase of a lasting bull trend. As mentioned above, the 1.2150 level for the EUR/USD is a remarkably important level - far more influential than just the range low of the past three months’ worth of price action. However, there is also the technical picture for the DXY Dollar Index. Some would make the argument that the favored measure for the currency has already claimed its break. We have cleared the trendline resistance comprised of lower highs dating bak to March 2017 down around 90.35. Then there is the former support to a three-year head-and-shoulders pattern - broken back on January 12th - which subsequently stepped in as new resistance. That barrier roughly at 90.75 has also been surpassed. Yet, I would give additional credit to the 91.20 level which is the confluence of Fibonaccis - the 38.2% of the 2008 to 2017 run and the 50% of the 2014-2017 bull leg.

There are No Reliable Alternatives to Genuine Fundamentals

Notching yet another distinct technical clearance would be a significant milestone in raising the Dollar's bullish profile, but that alone would not lead me to a definitive expectation of a lasting bull trend. Fueling such a drive - a systemic reversal - requires conviction which is founded on fundamentals. This is where the Greenback's appeal is most seriously called into question in my book. Expectations of higher returns is a key point of favor for the currency, yet it has dove in defiance of this point of optimism for months. Relative growth is for economic text books rather than investors. As for the alleviation of political risks, that is still troubled waters and the absence of a crisis is not necessarily expectations of plenty moving forward. We discuss the Dollar's appeal and its struggles moving forward in today's Quick Take Video.

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