US Dollar Technical Strategy: So Close, Yet So Far From A Significant Break
The Major Known Event Risk Is Behind Us, What Comes Next?
What Is Needed For a USD Breakout?
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The US Dollar has had the fundamental backdrop for a breakout even the most optimistic US Dollar Bulls should be thankful. However, after the Brexit vote was confirmed on June 24, the US Dollar has failed to make significant headway. A lack of upside appears worrisome because what the market is not doing can be as significant (if not more so) than what is doing because investors, therefore, do not see the value in bidding up an asset with an ideal fundamental backdrop.
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Of the four counterparts for the US Dollar of the EUR, GBP, JPY, & AUD, only the AUD had a great run post-Brexit that could help make the argument that there was a better purchase over the US Dollar. The JPY initially strengthened to 98.77 on the Brexit confirmation but has since weakened to ~106 JPY per USD. GBP has been volatile as expected, though it has firmed post-Theresa May’s appointment as PM along with her cabinet.
If the US Dollar cannot find lift-off here, it’s tough to imagine the scenario that it will. Thankfully, we can look to the charts for guidance from here.
The Fundamentals And Technical Picture May Be Aligning to US Dollar Strength
Given the technical picture on the charts, we are now seeing fault lines before the ceiling breaks on US Dollar. Currently, we have resistance at 12,050/53 (post-Brexit high). A breakout above the H2 Opening range high would favor the USD is beginning to flex its muscle as a reserve currency despite the Fed’s wishes. Below, we’ll discuss what levels to watch, and what other markets could complement such a strong move.
The Bearish channel (red) has done a fine job of framing price action. When combining the bearish price channel with the 200-Day Moving Average (12,023), you can begin to see that we are still in a corrective price channel. Therefore, we must await a breakout before we celebrate the strength of the US Dollar and only a break above resistance should favor the Bulls well into Q3.
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Support & Resistance Levels As of July 7, 2016
We’ve warned that even a dire fundamental picture in the US regarding expected interest rate hikes (a fundamental driver of currency strength) could be swept aside with a break above the 12,050 zone. The price appears to have found resistance for now, but a break higher should turn focus on further US Dollar upside.
While resistance is clustered in the 12,023 (200 DMA) and the post-Brexit higher of 12,053, the support levels are more dispersed. Post-Brexit, initial Support has been found in the 11950/60 zone. A break below initial support would favor a move toward the 38.2% Fibonacci Retracement zone of the post-Brexit range at 11,911. Below there, the Weekly S2 Support sits at 11,897. If we’re going to see a breakout higher, these levels should hold.
A break below the 11,900 level would favor a larger Dollar-negative shift that could put us on the watch for a retest of the May/June lows ~11,670/680.
One thing to be on the lookout for are the implications of the announcement that former Chairman of the Federal Reserve, Ben Bernanke would be advising the Bank of Japan. He was a proponent of ‘Helicopter Money’ as a last resort if QE efforts and effects have reached their limit and the government is unwilling to create a fiscal policy to stimulate aggregate demand.
Such a move would likely bring a lot of volatility in the JPY as well as the entire global financial system if a new step is taken by the Bank of Japan to accelerate growth.
Shorter-Term US Dollar Technical Levels for Thursday, July 14, 2016
For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours of trading.
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