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Analysis of the Dollar Breakout

In mid-April, the US dollar began what has been – at least through the end of the month – a dramatic and relentless move to the upside against virtually all the other major currencies. A one-year chart of the US dollar index (DXY) shows the rally at least sufficient to break above a downtrend line one could draw on the chart, and having moved significantly above the 91.00 level where an earlier rally, in March, faltered.

The US dollar rally began with strong fundamental news on April 17th of a higher than expected rise in U.S. industrial production for the month of March. February had already shown strong industrial production numbers, so the March number of up 0.5% may have been taken by the market as a confirming indication of an overall strengthening U.S. economy.

Good news for the U.S. economy was compounded by bad news for the Eurozone, as expectations for linchpin Germany’s economy fell to their lowest level in six years.

While those were two of the major immediate catalysts for the US dollar rally, what lies more firmly and fundamentally at the back of it is simply a steadily strengthening U.S. economy. March, 2018 sees U.S. unemployment at 4.1%, an attractively low level that hasn’t been seen in the previous decade. Job growth has been accompanied by increasing wages. Real US GDP growth in 2017 approached 3%, and the yield on 10-year Treasury bonds is higher than 3% for the first time in almost five years.

Additionally, US Federal Reserve Chairman, Jerome Powell, has indicated a significant policy shift from the days of chairpersons Bernanke and Yellen. During the Bernanke and Yellen years, even the slightest hiccup in the stock markets was sufficient to cause the Fed Chair to abandon planned rate increases and go scurrying back toward quantitative easing. Not so with Powell, who didn’t so much as bat an eye over a substantial and volatile downside correction of over 10% in the S&P 500 Index earlier this year.


Technical Outlook – Eur/Usd

An examination of the daily chart in Eur/Usd shows price levels significantly below both the 20-period and 50-period moving averages for the first time in 2018. The pair has also dropped below the 20-period moving average on the weekly chart.

With Eur/Usd currently trading around the 1.2050 level - having declined sharply from a trading range of approximately 1.2250 to 1.2400 that had been appearing as a possible support level – the next major support area appears to be down around the 1.1500 to 1.1700 level. Below that, 1.0500 beckons.

To return any hope to bulls, Eur/Usd would first have to get back above the major moving averages (currently around 1.2250). A longer term uptrend would only see confirmation with a daily close above 1.2500, which would then target the 1.3900-1.4000 level not seen since early 2014.


Technical Outlook – Gbp/Usd

Despite continuing anxiety in some quarters over the UK economy post-Brexit, Gbp/Usd had been enjoying a sustained uptrend since late 2017. In fact, of all the major currencies, Gbp has been the strongest against the US dollar - that is, up until the last 11 trading days. Over that time frame, Gbp/Usd has plummeted from a recent high around 1.4250, down to near 1.3750 – a decline of approximately 500 pips in just a bit more than two weeks.

The 50-period and 100-period moving averages on the daily time frame offered vitally no support. The next level for testing support is the previous pullback low of 1.3710. Should the 200-period moving average, which lies around the 1.3600 price level, give way as easily as the 50- and 100-day moving averages did, that could definitely create a “death cross” situation.

If Gbp/Usd manages to weather the bearish storm, the long-term bullish outlook includes eventually moving up to test the critical 1.5000 price level.


Technical Outlook – Usd/Jpy

The dollar rally has extended into Usd/Jpy, which is trading above the 20-day, 50-day, and 100-day moving averages for the first time since early January. Price is currently just below the 200-day moving average, and in the 109.50-110.00 trading range that has previously acted as a significant support/resistance level. A breakthrough above 110.00 could turn that price level into strong support and open the door for a rally into the 112.00 to 115.00 area.


Conclusion

The US dollar is also rallying strongly against other major currencies, including the Australian and Singapore dollars. While nothing is certain in today’s rapidly changing, global economy, it’s possible that, supported by a strengthening U.S. economic outlook, 2018 may mark the beginning of a significant, long-term uptrend in the relative value of the US dollar.

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