Is a Market Turn In the U.S. Dollar Getting Close?
It’s old news that the U.S. dollar is weak. In fact, the U.S. dollar is so weak that it has been on a one way path of devaluation since early June. If we know anything from the last two years of economic unrest in the global financial markets, one thing we do know is that U.S. dollar direction tends to be sharp and long. A quick look at the U.S. Dollar Index is quite revealing.
In the chart pictured above, you can see quite clearly that the U.S. dollar has moved, for the most part, in very strong trending moves for months and years at a time over the last 4 years. Although there have been small retracements in each impulsive move, you can see that traders who focus on trend following techniques in the U.S. Dollar Index have been offered plenty of trade opportunities over the last few years. Let’s break down a quick recap of U.S. dollar direction over the last 4 years.
2006 to July 2008 – Weak Dollar
Federal Reserve maintains very low interest rates in U.S., which leads investors to move capital out of the dollar.
July 2008 to March 2009 – Very Strong Dollar
Investors rush into the safety of the U.S. dollar as The Great Recession threatens the very existence of the global financial system
March 2009 to November 2009 – Weak Dollar
Economic growth resumes, financial Armageddon has been averted. Investors flee the dollar due to 0-0.25% interest rates
November 2009 to May 2010 – Very Strong Dollar
Greek Debt Crisis unfolds. Very existence of Euro is questioned as investors make a run on the euro and capital flows out of risky investments
June 2010 to Present – Weak Dollar
Deteriorating economic conditions in U.S. lead Federal Reserve to begin talking about further Quantitative Easing measures. Causes dollar to fall precipitously.
Current State of U.S. Dollar
Currently, the U.S. dollar has been on a one way slide against every other major currency pair since early June. In early June, key economic data began showing signs of weakness, and by July it became clear that the economic recovery in the United States was facing major problems. Key leading indicators of economic health such as Unemployment figures, retail sales data, consumer demand numbers all began showing signs of economic deterioration. This caused a bit of alarm among the investing community and the dollar immediately weakened in the month of June.
By late July, it was clear the U.S. economy was facing major trouble, and at the end of the month, Federal Reserve Chairman Ben Bernanke testified before Congress and stated that the economic outlook in the U.S. was “unusually uncertain.” That is not exactly the reassuring verbiage the market wants to hear two years into an economic recovery. The dollar sell-off continued through July, August, and September. The Federal Reserve began downgrading growth prospects in the U.S., and everything combined caused the dollar to simply fall apart in the month of September.
Something very interesting happened on October 15, however, that showed there may be a turn of U.S. dollar strength in the near term. During the months of June through September, almost every time the Federal Reserve announced interest rates, a FOMC Report, any type of speech, or otherwise related forex news the dollar has sold off aggressively.
On October 15th, though, Mr. Bernanke was giving a speech at the Federal Reserve Bank of Boston, and he basically outlined why the Fed must go forward with another round of quantitative easing. Interestingly enough, the dollar did not sell off.
In fact, the dollar rallied significantly on Friday, and this could be evidence that further QE measures from the Fed are now priced into the market. The green shaded bubble in the chart above represents the time when Mr. Bernanke began speaking. The dollar did sell off just a bit during his opening comments, but it quickly recovered and headed much higher on the day.
Spot FX Highlight
This potential change of direction in the U.S. dollar can also be seen in the Spot FX Market versus the British Pound. You can see on the chart pictured above, that the GBP/USD has now formed a very clear Double-Top as depicted by the two green-shaded bubbles. If the GBP/USD can break below the red horizontal line, that should open up much lower prices in this pair and confirm dollar strength.
Currently, the global economic recovery is fairing relatively well in the EuroZone and in China. China is releasing very important GDP and inflation figures during the 3rd week of October, and if these numbers disappoint to the downside, it could help the case for further dollar strength in the near-term.
Furthermore, the underlying causes of the sovereign crisis in the EuroZone are still very real, and any further eruption there will most likely cause global investors to rush into the U.S. dollar once again. Dollar trends in currency trading tend to be long and pronounced, and technical and fundamental analysis are both pointing the very real possibility that we may see a turn of dollar strength in the near-term. But you never know, do you?