Dollar continues to grind lower

Updated: Jan 14, 2019

I said at the beginning of the week that the dollar could have a fight on its hands and since then the USD index has fallen back close to 95 from above 96.20 on Monday morning. It has managed to rebound somewhat since yesterday as the EURUSD drifted back below 1.15 after reaching a high of 1.1570 during the Asian session.

That’s partly due to a number of factors- rising US yields as equity markets stabilise and yet more very poor economic data out of Germany to name two, but the US currency still has a fight on its hands as far as I can see.

So, this morning I am going to have a brief technical look at the USD index and the EURUSD via a couple of simple charts. In keeping with what I said last Monday, I am going to refrain from further comment on the pound this morning, other than to note that the GBPUSD is continuing to hold its breath in between 1.27 and 1.28 ahead of next week’s vote.

The first chart I want to show you is that of the USD index where you can see the price continuing to back away from what is a clearly defined double top at 97.71 which marks the high reached last year-the base of that run started at 88.25- both levels denoted by the two parallel red lines on the chart.

The current run lower looks increasingly like its headed for a test of the first important Fibonacci retracement target (38.2% green line) which comes in at 94.098 which if seen would of course imply a further move higher on the EURUSD, a move that might take it above a key resistance level, which I will now show you via the next chart.

This chart is a simple line chart of the EURUSD onto which I have added some moving averages and as you can see the price has lifted above both its 55 and 100 daily moving averages and looks now in the process of heading for a test of the more important 200 daily moving average, currently at 1.1625.

Whilst this level is very important and a break above here is certainly live, it should also be remembered that this is still falling and hence until that flattens out and starts to rise, the longer term trend for the EURUSD remains to the downside.

Elsewhere this morning the Chinese currency has also continued to gain ground versus the dollar as the USDCNY drops back to its lowest level (around 6.75) since June last year. Looking a little lower down on this one 6.6960-6.6930 is an important support level now.

Hence, clearly the dollar is still struggling at the start of Q1, but all these moves may still prove to be little more than just a correction to the longer term trends which are still positive for the US currency.

However, today we do have some important US economic data that might have a further impact on the dollar in the short term. The December reading of US CPI inflation is due out at 1.30pm and is expected to be weak- the consensus calling for a negative -0.1% print on the month with a more pronounced annualized fall to 1.9% from the previous 2.2% reading widely expected, even as US average earnings are anticipated to a show a quite marked rise over the same period.

Now of course the fall in oil prices during the final quarter of 2018 could be a core reason for any significant drop in those inflation readings, but as usual the markets may choose to ignore that fact and simply use lower US inflation readings if seen as an excuse to push the dollar further south- we shall just have to see how that plays out later today.

Meantime, the equity markets have continued to push higher and that rebound has run hand in hand with oil prices moving back above $50 a barrel- WTI is trading around $53 as I write here. Once again I am trying to work out which one is leading the other as its simply not clear to me, but one thing is for sure; the two markets remain closely correlated and if you are an equity index or bond investor, then it’s surely wise to keep a close eye on Oil prices too.